Barbados downgraded three notches by Moody’s to B3 with negative outlook
By Keith Collister From Caribbean360
KINGSTON, Jamaica, Wednesday June 4, 2014 – Yesterday, the world’s second largest global credit rating agency, Moody’s, downgraded Barbados three rating notches to B3 from Ba3. Moody’s attaches numerical modifiers to each generic rating classification, so Barbados is now at the lowest possible rating (meaning its obligations are considered speculative and subject to high credit risk) before the C category (the top in that category, Caa obligations, being judged to be in poor standing and subject to very high credit risk), with the next categories down being ”very near” and actual default respectively.
The downgrade reflects four main drivers.
Firstly, the fiscal deficit widened to 11% of GDP due to lower than expected revenues, a function of Barbados’ continued economic decline. Moody’s notes both the public sector wage bill and transfers to loss – making public enterprises remain high, and interest payments have increased significantly. Despite the announcement of several fiscal adjustment measures, including widespread public sector layoffs, Moody’s believes the government will be challenged to meet a deficit target of 6-7% of GDP, as they expect a contraction of around 1% of GDP this fiscal year.
Secondly, the government’s debt burden has climbed sharply to 97% of GDP as of March 2014, from 85% at the end of 2012, and debt affordability has deteriorated significantly, with interest payments now consuming nearly 30% of government revenues. Moody’s note these ratios are among the highest in the B category, and appear to be worsening. Two thirds of the government’s debt issuance in 2013 was short term, reflecting challenges replacing long term debt, with gross financing needs (including short term debt) expected to exceed 30% of GDP in 2014 and 2015.
Thirdly, net international reserves of US$550 million are roughly one quarter below where they were at the end of 2012, despite a US$150 million bank loan in December 2013, and a similar US $75 million bank loan in March of this year. Moody’s expect a continued decline in net international reserves, due to this year’s expected current account deficit of 8% of GDP and a continuation of the decline in private sector inflows that began in 2011.
Finally, part of the government’s short term debt has been financed by the Central Bank of Barbados, putting pressure on the country’s crucial currency peg to the US dollar.
Despite this very sharp downgrade, Moody’s has placed a negative outlook on Barbados, based on their view that Barbados will continue to find it difficult to meet its fiscal targets due to both weak revenues and expenditure “rigidities”, high levels of short term domestic borrowing increasing financing risks, and continued central bank financing of the fiscal deficit putting pressure on the currency peg. Moody’s observe that Barbados’ rating would experience further downward pressure ”if it becomes clear that the government faces a trade-off between debt servicing and maintaining the currency peg”.
Moody’s conclude that while an upgrade is unlikely given the negative outlook “we could stabilise the outlook if the government’s fiscal consolidation plan leads to a stabilisation of debt ratios, the economic outlook improves on a sustained basis with GDP reporting positive growth, the government materially decreases its reliance on short –term debt and central bank financing, and international reserves steadily increase.”
Commenting on the downgrade, Barbados leader of the Opposition Mia Mottley stated that it “cannot be business as usual” and that the “further downgrade by a staggering 3 notches must jolt us into our true reality”.
In his comment, CIBC’s chief emerging market economist John Welch observed “We are concerned about the stark deterioration in the fiscal figures in 2013/2014, but the government reacted to these unsatisfactory trends at the end of 2013 by increasing and accelerating implementation of fiscal reforms. Moreover, external accounts show significant improvement despite lower tourism growth. The Moody’s downgrade, as well as the S&P downgrade before that, signals an imminent government debt restructuring, something we do not expect.”
Keith Collister works for the Sandals group as a financial analyst with the title, Director for Special Projects, Finance and Planning Division, where he supports the group global CFO. Mr Collister is also a leading Jamaican financial analyst, appearing on Jamaica radio and tv to comment on the financial issues of the moment as time permits. He has also written for the FT owned Banker Magazine, Latintrade and Euromoney’s Latinfinance.
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Barbados economy continues to face “considerable economic challenges” – IMF
From Caribbean360
BRIDGETOWN, Barbados, Friday June 6, 2014, CMC – A team from the International Monetary Fund (IMF) is Thursday continuing talks with island officials as part of a monitoring programme on fiscal measures aimed at restructuring government finances, agreed to last year.
Headed by Deputy Division Chief, of the Western Hemisphere, Nicole Laframboise, IMF representatives are meeting persons from the Ministry of Finance, after having talks with Chamber of Commerce and Central Bank officials separately on Wednesday, and private bankers Tuesday.
The IMF visit is seen as a follow-up to a February consultation report when it stated that the island was suffering from a weak macroeconomic performance that began since 2008 and a contraction of the economy in 2013 by 0.7 per cent.
Chairman of the Private Sector Agency, Alex McDonald, who participated in the Wednesday talks with the IMF told local media, “The talks were wide-ranging and informative on both sides”.
The IMF representatives reportedly told stake holders in the meetings so far, that they wanted direct feedback on the performance of Barbados’ fiscal and economic strategies.
The IMF February report followed a December visit by a team, also led by Laframboise.
At the end of that visit, the team stated, “The Barbados economy continues to face considerable economic challenges. The authorities agreed with staff on the need for urgent policy adjustments and deeper reforms over an extended period to restore fiscal and external sustainability. Weak exports and tourism arrivals, slow growth, and expansive fiscal policy have led to a sharp increase in public debt and fiscal financing pressures”.
For more on this story go to: http://www.caribbean360.com/business/barbados-economy-continues-to-face-considerable-economic-challenges-imf?utm_source=Caribbean360%20Newsletters&utm_campaign=c983028cb8-Vol_7_Issue_022_Business6_6_2014&utm_medium=email&utm_term=0_350247989a-c983028cb8-39393477
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Op-Ed: Does Jamaica have lessons for Barbados?
From Caribbean360
KINGSTON, Jamaica, Friday June 6, 2014 – For most of the past forty years, the opposite was argued, namely that Barbados had lessons for Jamaica due to its combination of fiscal prudence, faster growth, higher living standards, all combined with better education and much greater social capital. Their stronger social consensus was particularly noteworthy under former Prime Minister Sandiford, who instead of devaluing their currency as the IMF demanded, cut both pay and the public sector workforce under a tripartite wage agreement of shared sacrifice for the national good between the government, unions and private sector in the early 1990’s.
This time may be different. Until very recently, despite the global crisis, Barbados appeared to believe it could carry on with business as usual. Yesterday, however, global rating agency Moody’s downgraded Barbados by a massive three notches to B3, equivalent to the B- rating their bigger competitor Standard and Poors has for Jamaica. The next stop is C, implied by Moody’s retention of a negative outlook for Barbados, a massive blow for a country that not long ago was part of the elite club known as investment grade.
After a nearly two decade long boom, Barbados had become excessively reliant on the sale of luxury real estate to rich foreigners, international financial services and a dated tourism product, all of which suffered during the global crisis. Since 2009, Barbados’ fiscal deficit has been moving in the opposite direction to that of Jamaica, reaching 11% of GDP, compared with Jamaica’s now balanced budget. Jamaica achieved a primary surplus, excluding interest costs, of 7.5% of GDP last fiscal year, compared with a primary deficit of 4% in Barbados. This is despite the fact that interest costs for both countries now represent roughly 30% of revenues at a time when Barbados’ debt to GDP ratio is about to exceed 100%.
Jamaica came to the realisation that business as usual was no longer possible much earlier, in 2009, and with hiccups, has been a process of adjustment ever since. This process of adjustment has accelerated over the last two years under the leadership of Finance Minister Peter Phillips. Jamaica’s fiscal deficit has now been eliminated, the current account deficit is falling, and net international reserves and foreign direct investment are rising. Jamaica now has prospects for a turnaround, however difficult.
Barbados, having procrastinated, looks like it is only at the very beginning of an extremely arduous period of adjustment, almost certainly under the stewardship of the IMF, perhaps starting before the end of this year.
The key lesson here is that those offering themselves for public office need to show the leadership to take the tough decisions early when fixing them will be less painful, and have the discipline to see those decisions through so any gains from the pain are not wasted. Jamaica has nothing to crow about however, as it also has many tough decisions still to take to achieve a sustainable fiscal adjustment. Perhaps both countries can learn from, and help, each other, collectively tapping in to what seems the almost forgotten spirit of Caricom and general Caribbean brotherhood. (Republished with the permission of the Jamaica Observer)
For more on this story go to: http://www.caribbean360.com/business/op-ed-does-jamaica-have-lessons-for-barbados?utm_source=Caribbean360%20Newsletters&utm_campaign=c983028cb8-Vol_7_Issue_022_Business6_6_2014&utm_medium=email&utm_term=0_350247989a-c983028cb8-39393477
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Moody’s downgrade of Barbados’ credit rating is like ‘garbage’ – Stuart
From Caribbean360
BRIDGETOWN, Barbados, Monday June 9, 2014, CMC – Prime Minister Freundel Stuart has likened to trash, Moody’s recent lowering of the island’s credit rating because the island administration will not engage in uncontrolled borrowing from the international market.
Against the backdrop of last week’s downgrade from Ba3 to B3, Stuart said “what they say is only relevant if we want to embark on an orgy of foreign borrowing in which people should know how much we should have to borrow, how much our money should cost”.
“But if we are not intending in the short or medium term to go to the capital markets to borrow money, what they say has as much value as what you would see in any garbage dump collected by the Sanitation Services Authority (the island’s thrash collection agency).”
Stuart’s statement contrasts with actions of his government that currently has an amendment bill before parliament seeking to raise his administration’s borrowing limit from BDS$1.5 billion to $2.5 billion (one BDS dollar = 50 cents US).
That amendment was expected to be debated in parliament last Tuesday, but the Moody’s downgrade was announced on that day and before the meeting of the House began, and there was no discussion on the bill.
This opened the door for speculation that the downgrade announcement upset the administration’s plans for the additional one billion dollars it was seeking to acquire for borrowing through the bill.
The government has also indicated that it has no intention of devaluing the local currency in the wake of the US-based rating agency’s report
The Barbados dollar is trading at US$0.50 cents.
Finance Minister Chris Sinckler in a statement said that devaluation is not even being considered by the Freundel Stuart administration as it grappled with efforts to turn around an ailing economy
Moody’s Investors Service said the three-notch downgrade reflects the reinforcement of negative fiscal trends given the increasing size of the country’s fiscal deficit, which exceeded 11% of GDP in fiscal year 2013/14, and “our expectation of continued challenges to fiscal consolidation”.
Moody’s, which had previously downgraded the bond rating to Ba3 from Ba1 last December, also highlighted the increasing government debt ratios, projected at above 100% of GDP by fiscal year 2014/15, coupled with elevated short-term debt issuance and gross financing needs in excess of 30% of GDP in 2014 and 2015.
For more on this story go to: http://www.caribbean360.com/news/moodys-downgrade-of-barbados-credit-rating-is-like-garbage-stuart
Last week, the International Monetary Fund (IMF) said that the local economy was continuing to “face major challenges, including low growth, a very large fiscal deficit and a high debt burden” .
