New York, June 02, 2014 – Moody’s Investors Service has today downgraded Barbados’ government bond rating to B3 from Ba3. The outlook remains negative. The three-notch downgrade reflects the following drivers:
• Reinforcement of negative fiscal trends given (i) the increasing size of the fiscal deficit, which exceeded 11% of GDP in FY 2013/14, and (ii) our expectation of continued challenges to fiscal consolidation;
• Increasing government debt ratios projected at above 100% of GDP by FY 2014/15, coupled with elevated short-term debt issuance and gross financing needs in excess of 30% of GDP in 2014 and 2015;
• Moody’s expectation of a decline in international reserves this year, due to large current account deficits and weaker private sector inflows;
• Central bank financing of the fiscal deficit that will increase pressure on the country’s currency peg to the US dollar.
RATINGS RATIONALE
FIRST DRIVER — WIDENING GOVERNMENT DEFICIT AND FISCAL INFLEXIBILITY
The deficit in fiscal year (FY) 2013/14 exceeded 11% of GDP. This deficit was driven by lower-than-expected revenues, linked to last year’s slight economic contraction. Despite the authorities’ recent efforts, expenditures remain high and rigid, particularly the public sector wage bill and transfers to loss-making public enterprises, and interest payments have increased significantly. The government announced several fiscal adjustment measures, including widespread public sector layoffs, but we think the authorities will be challenged to meet a deficit target of 6-7% of GDP in the running FY, given Moody’s projection of a GDP contraction of around 1% this year.
SECOND DRIVER — LARGE DEBT STOCK, ELEVATED SHORT-TERM DEBT RELIANCE, GROSS FINANCING NEEDS IN EXCESS OF 30% OF GDP
The government’s debt burden has climbed sharply and debt affordability has deteriorated significantly. The debt-to-GDP ratio had risen to 97% as of March 2014 from 85% at the end of 2012, and interest payments now consume nearly 30% of the government’s revenues. These ratios are already among the highest in the B rating category, and we expect that government debt metrics will continue to worsen.
Concomitantly, there has been a marked deterioration in the government’s debt profile given a significant increase in domestic short-term borrowings over the past several years. During 2013, two-thirds of the government’s debt issuance was short-term, reflecting the challenges the government faces in terms of placing long-term debt. Because of this, the government’s gross financing needs will be in excess of 30% of GDP in 2014 and 2015, when short-term debt is included.
THIRD DRIVER — EXPECTED CONTINUATION OF DECLINE IN INTERNATIONAL RESERVES
In December 2013, international reserves increased due to a US$ 150 million bank loan received by the government. Reserves have remained relatively stable throughout the first quarter of 2014, in part because the government received an additional US$ 75 million bank loan in March. Nevertheless, at US $550 million reserves are roughly one-quarter lower now than they were at the end of 2012. As Moody’s expects a current account deficit of 8% of GDP in 2014 and private sector inflows to continue the downward trend they have exhibited since 2011, we anticipate international reserves will likely decline again.
FOURTH DRIVER — INCREASED PRESSURE ON CURRENCY PEG
Part of the increase in the government’s short-term debt has been financed by the country’s central bank, a practice that became more prevalent last year. While supportive of government borrowing costs, such financing of the fiscal deficit pressures the country’s currency peg to the US dollar, long considered a critical element of Barbados’ economic policy framework.
RATIONALE FOR CONTINUED NEGATIVE OUTLOOK
The continued negative outlook on Barbados’ rating incorporates our expectation that (i) the government will continue to find it difficult to meet its fiscal deficit targets owing to both weak revenues and expenditure rigidities, (ii) high levels of domestic short-term borrowing will continue to undermine the government debt profile and lead to increased refinancing risks, and (iii) continued central bank financing of the fiscal deficit will compromise authorities’ ability to preserve the currency peg.
WHAT COULD MOVE THE RATING UP/DOWN
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, given past evidence of the central bank’s financing of the fiscal deficit.
While an upgrade is unlikely given the negative outlook, we could stabilize the outlook if the government’s fiscal consolidation plan leads to a stabilization 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.
COUNTRY CEILINGS
Moody’s today also adjusted Barbados’ local-currency bond and deposit ceilings to Ba3, its long-term foreign-currency bond ceiling to Ba3, and its long-term foreign-currency deposit ceiling to Caa1. The short-term foreign-currency bond and deposit ceilings remain unchanged at Not-Prime.
