Barbados’ borrowing profile upgraded by Moody’s

International ratings agency Moody’s Investors Service has announced an upgrade to the Barbados government’s issuer ratings, raising it to B3 from Caa1, and maintaining a stable outlook.

The agency also predicted that Barbados’ debt burden could decrease to approximately 80 per cent over the next five years. It is currently hovering near 120 per cent of the country’s economic output.

The upgrade was attributed to the success of fiscal consolidation and a strong economic recovery that led to a decline in the country’s debt burden. The implementation of “durable structural reforms” supported higher fiscal primary surpluses, while reduced government liquidity risk, along with an adequate foreign exchange buffer, further bolstered the island’s credit profile.

Welcoming the news, Professor Avinash Persaud, Special Envoy to Prime Minister Mia Mottley, told Barbados TODAY the improvement in the credit rating from Moody’s signalled that Barbados “has clearly and transparently entered the era of sound debt management, a safer currency and improving international credit ratings”.

“With this upgrade, we have today moved from the C-ratings to the B-ratings,” he said, declaring that it was a clear sign that the economy “has surpassed pre-COVID levels”.

Persaud said “we are in a position to redouble our development efforts, especially with regard to long-term health, housing and tourism projects”.

According to the ratings agency, “Barbados’ local currency country ceiling has been moved up in line with the sovereign rating and is now set at Ba3, while the foreign currency country ceiling was raised to B2 from B3.”

Moody’s explained that the three-notch gap between the sovereign rating and the local currency ceiling reflects low government intervention in the economy, strong rule of law, consistent macroeconomic policies, and low political risk. The two-notch gap between the foreign-currency ceiling and the local currency ceiling incorporates relatively high external vulnerability and capital controls on foreign exchange movement.

The rationale for the upgrade to B3 was linked to the significant progress Barbados made before the COVID-19 pandemic in addressing the root causes that led to the sovereign default in 2018. Over the past two years, the debt burden has decreased and is once again on a downward trajectory.

Moody’s expects medium-term growth to moderate around 2 to 3 per cent, supported by investments in climate-resilient infrastructure, renewable energy, and tourism sector construction. The agency also anticipates a gradually increasing primary surplus that will ensure the government debt ratio continues to decrease.

The ratings agency highlighted the government’s progress in advancing the structural reform agenda, including improvements in public financial management, revenue collection, pension reform, and state-owned enterprises reform, all aimed at further reducing government transfers to public sector entities.

Moody’s expects that these efforts will enable the government to achieve its target of a primary fiscal surplus of 4.0 per cent of GDP by the financial year 2024/25, reinforcing the downward trajectory of the debt burden. The agency predicts that fiscal transfers to public entities will reduce, supporting higher fiscal primary surpluses over the medium term, leading to a consistent reduction in the debt burden. Under Moody’s baseline scenario, the debt-to-GDP ratio is expected to approach 80 per cent over the next five years.

As of June this year, the debt was estimated to be around 117 per cent of GDP.

Moody’s acknowledged that Barbados’ efforts to build climate resilience and limit exposure to shocks bode well for economic performance. It also noted that reduced government liquidity risk, coupled with an adequate foreign exchange buffer, further supported the country’s credit profile.

The stable outlook, according to Moody’s, reflects a balance between elevated credit risks related to still-high debt and interest burdens, and the agency’s expectation of a firm downward trajectory for debt metrics in the coming years.

Moody’s outlined several factors that could lead to an upgrade or downgrade of the country’s ratings in the coming months. Upgrades could occur if fiscal consolidation efforts result in a faster-than-expected drop in government debt metrics, or if sustained rates of economic growth, supported by successful implementation of structural reforms, demonstrate improved competitiveness. On the other hand, downgrades could happen if the government’s fiscal consolidation efforts prove insufficient to prevent persistent debt accumulation or if there are renewed pressures on foreign-exchange reserves, introducing risks to the external accounts and putting downward pressure on the rating.

(MM)