BU understands the following flash report was circulated to an email distribution list which the Central Bank of Barbados maintains. We have scanned the website of the Central Bank of Barbados to determine if the communication was posted for all Barbadians and others to access. What is noteworthy is that there is a confirmation the downgrade WILL increase government’s cost of borrowing. Such a position conflicts with the spin and lack of concern being conveyed by the political directorate of Barbados. Eight years is a long time for a country to be subjected to a deluge of negative reporting about the performance of the economy. Bear in mind there is a ‘nexus’ to the quality of the social landscape we enjoy – David (BU)
Dear Associates:
LATAM Strategy Flash: Barbados – Moody’s Downgrades Barbados to Caa1 Despite Clear Improvement in External and Fiscal Accounts – April 4, 2016
Barbados: On April 1st 2016, Moody’s Investors Service downgraded the Government of Barbados’ government bond rating and issuer rating to Caa1 from B3, and changed the outlook to stable from negative, citing: slow progress in achieving debt-sustainable fiscal consolidation; low foreign exchange (FX) reserves; and weak financing conditions. This comes after a triple-notch downgrade in June 2014 and the maintenance of their negative outlook ever since. The negative outlook represented a more than 33% chance that Moody’s would downgrade Barbados’ credit rating over the medium-term. In December 2015, Moody’s indicated that another downgrade would be likely if the country faced “…a trade-off between debt servicing and maintaining the currency peg, given past evidence of the central bank’s financing of the fiscal deficit…”
Bottom Line: Although we are not comfortable with the central bank financing fiscal deficits, we find this action unwarranted and confusing. We also do not see from their analysis the so-called trade-off, because the countries with more flexible exchange rates have on average defaulted more times, not fewer. Moody’s is saying that Barbados will almost surely default, and is putting the onus on its fixed exchange rate. Barbados has never defaulted, and the rating agencies have reserved these single-B and below ratings for serial defaulters or countries just coming out of default. Expect widening on the news; but we do not think Barbados’ credit is worse than BB and still recommend buying on whatever sell-off we see.
Following Moody’s previous negative outlook and insufficient progress to date in stabilizing debt ratios, the rating action does not come as a complete surprise, although the level is exceedingly low for a country that has never defaulted. The Government of Barbados finds itself in the same rating bracket (Caa) as Caribbean sovereigns such as Belize (rated Caa2 with a stable outlook) and Jamaica (rated Caa2 with a positive outlook), both “serial defaulters”. IMF forecasts suggest that Barbados’ short- to medium-term economic growth prospects appear weaker than both Belize and Jamaica (see Figure 1). Barbados’ projected nominal fiscal deficit is larger as a percent of GDP than its counterparts, and the 2014/2015 interest expense/revenue was only marginally better than Jamaica’s –26% for Barbados compared to 30% for Jamaica and 9% for Belize. However, the projected Debt/GDP ratios and external current account balances are on par, even when taking into account that both Jamaica and Belize are coming off significant debt restructurings. Finally, Barbados’ external debt as a percentage of total outstanding gross government debt is lower (30% for Barbados at December 2015 compared to approximately 83% and 59% for Belize and Jamaica respectively), but so are its FX reserves (13.8 weeks of import cover for Barbados compared to approximately 22.5 and 23.5 for Belize and Jamaica respectively).
The revision of the outlook to stable suggests little probability of a further downgrade, even if policy measures and economic indicators continue on their current trajectory.
Although Moody’s rating downgrade will likely increase the government’s cost of borrowing internationally, it does not represent a material change in our view about the sovereign. The probability of a devaluation of the currency remains low as FX reserves remain adequate—and, as we have elaborated elsewhere, the external accounts have adjusted into the region of strong solvency. Moreover, external debt as a percentage of total debt is low, and the government has access to other, more favourable policy options. These include access to concessionary multilateral financing, request of funds in the context of an official IMF programme, expensive short- to medium-term financing similar to the 2013 Credit Suisse facility, and additional fiscal contraction to curtail domestic demand for imports.
Economic Trends
The Government of Barbados has made some progress in reducing its fiscal deficit and maintaining foreign exchange reserves above 12 weeks after briefly falling below that benchmark during 2013 (see Table 1).
Table 1: Recent Trends in Barbados’ Major Economic Indicators, 2008 – 2015
Further, low global crude oil prices and a boost in tourist arrivals from major source markets have significantly improved the external current account deficit. Cuts to personal emoluments, transfers, and subsidies, and the imposition of additional taxes improved the fiscal deficit from 11% of GDP in fiscal year 2013/2014 to reportedly just over 4% of GDP in fiscal year 2015/2016. FX reserves recovered to 13.8 weeks of import cover by the end of 2015, after dipping below 12 weeks during the last quarter of 2013. Additionally, fuel imports declined 31% in 2015 and tourist arrivals rebounded 14% after three consecutive years of negative or modest growth, while the external current account deficit almost halved from 9.1% of GDP in 2013 to 5.2% of GDP two years later. All these developments indicate improving sovereign creditworthiness, not deterioration.
However, major economic and funding challenges remain. Notwithstanding greater tourist arrivals, average length of stay and tourist expenditure have declined, restricting more robust growth in tourism value-added. The rest of the economy remained weak in 2015 as delays in major projects reduced construction output by 3%, while activity in the distributive sectors remained virtually flat as average unemployment remained elevated at 11.8%. Cash flow issues persist as the central bank provided most of domestic funding during the last two fiscal years, and commercial banks have substituted investments of longer-term bonds to hold short-term Treasury Bills. Gross government debt excluding NIS holdings continues to climb, rising from 100% of GDP in 2014 to 107% in 2015. Despite an improved external current account deficit, higher debt service and limited capacity to access international capital markets reduced foreign exchange reserves during 2015. Additionally, the government’s initial estimates for fiscal year 2016/2017 suggest an increase in the nominal fiscal balance to 5% of GDP, which will likely lead to further debt accumulation. Significantly reducing the fiscal deficit will require some privatization of public assets and/or additional fiscal consolidation.
Figure 1: Comparison of Barbados’ Economic Prospects with Other Caa-rated Caribbean Sovereigns
Sources: IMF October 2015 World Economic Outlook, Belize 2015 IMF Article IV Consultation Staff Report, Jamaica IMF Tenth Review Under the Arrangement Under the Extended Fund Facility and Request for Modification of Performance Criteria Staff Report
External accounts continued to improve along with substantial improvement in external solvency indicators (see Figure 1, above).Foreign exchange reserves have stabilized should finish the fiscal year with a USD 46 mln. Export growth is on track to reach 6.5%, while imports continue to contract.
*This Flash was written in conjunction Shane Lowe, Chief Economist
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