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We have repeatedly heard that Barbadians should not be concerned with the downgrades from international rating agencies as the current government administration has no plans to borrow money on the international market.
Given the timing of the next elections, this statement may very well be true; however, at some point, Barbados must replenish the diminishing foreign reserves either from foreign direct investments or through borrowing on the international market. The effects of the international ratings will have a significant impact on both and according to Inter-American Development Bank, 95% of government’s revenue is earned through taxation.
Per the Central Bank of Barbados Press Release, the stock of international reserves at the end of December stood at BDS $681 million, equivalent to 10.3 weeks of imports. The Report of the Deficit Committee of the Social Partnership highlights the annual amount expected to be repaid for external debt juxtaposed against the current trend in foreign reserves:
As can be seen in the first table, in 2021, we are expected to repay foreign debt of BDS $300 million or renew at the current prevailing rates.
As can be seen in the second table, in 2021, Barbados will have projected foreign reserves of BDS $31 million. It is not difficult to see that our current trajectory calls for serious concern. Urgent action is required to ensure that Barbados does not find itself in a position where we are forced to roll our debt at exorbitant rates.
This is why international ratings matter. The interest rate that we may be forced to roll our debt at will be simply unaffordable, as the coupon rate of 7% that we are presently paying already causes us to struggle. The current market yield rate for the bond due in 2021 is 13 to 15%. If we continue to be downgraded, this rate of interest will continue to increase. Let us also not forget that there is another bond due in 2022 to the tune of approximately BDS $100 million.
Regarding foreign direct investments, it is not difficult to imagine that our current ratings make us appear risky to overseas investors. As it goes, the higher the risk, the greater the expected reward. Therefore, investors will expect a higher percentage return that we would likely be able to afford, or expect significant compensation, whether it be by tax exemptions, concessions and so on.
The IMF has been proposed as an alternative to borrow funds at a reasonable interest rate. There are several fears and misconceptions around this option, some valid, some exaggerated. Of course, the IMF is not a risk-free solution; it is expected that a plan is in place highlighting solutions for identified issues. It is crucial that if we select this option, we have our own home-grown plan with viable and sustainable objectives. The IMF will then assess its feasibility and determine if it is worth the risk.
The ultimate fear is that the IMF may require cuts in wages and salaries, imports, or transfers and subsidies; areas that will make any government administration unpopular in the eyes of the populace, and popularity, of course, is paramount during an election season.
So the question is, what will we do? What is the plan? We have been recently told after a score of downgrades that a sound recovery plan is on the way. Have we finally accepted that the country needs urgent care? I, like many Barbadians, wait with bated breath.