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    November 25

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Barbados still in the woods

JMMB GROUP,

Added 16 May 2017

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The JMMB Group, a Jamaica-based financial firm with 220 000 clients in Jamaica, Trinidad and Tobago and the Dominican Republic, is still advising its clients to sell their Barbados holdings. In its most recent investor update released last month, JMMB also said Barbados might have to turn to the International Monetary Fund.

Below, JMMB highlights its concerns and why it is keeping its “sell” recommendation. 

BETWEEN 2006 AND 2016, Barbados experienced ten consecutive rating actions by international rating agency Standard & Poor’s (S&P). In March, 2017 that number increased to 11 with S&P downgrading Barbados’ sovereign credit rating from “B-“ to “CCC+”; the negative outlook has been maintained.

When a country is rated at “CCC+” it means that S&P is of the view that the country is vulnerable to non-payment of its debt and is dependent on favourable business and economic conditions to meet its obligations. The rating further means that in the event of adverse economic or financial conditions, it is not likely that the country will be able to meet its obligations on time and in full. 

Strong probability of another downgrade

Because the negative outlook has been maintained, it means there is a strong probability that the country could be downgraded again over the next six to 24 months. Of further concern is the fact that the Government has not demonstrated the willingness to take timely and proactive measures to strengthen its fiscal profile.

Recent data indicates that for the first nine months of the 2016/17 fiscal year (April to December- 2016), the Central Bank and the National Insurance Scheme (NIS) wholly financed the Government’s borrowing requirements. In recent months private financial institutions have reduced their exposure to Government securities by selling bonds.

Tapping the Central Bank’s resources, however, runs counter to the government’s long standing policy of defending the fixed exchange rate peg (US$2:BD$1) and limits its ability to act as lender of last resort to the financial system in the event of an escalating financial crisis. Tapping the Central Bank’s resources also raises questions regarding the printing of money and its impact on inflation.

The recommended strategy during crises situations is increased taxation and deep expenditure cuts. Utilising external help in the form of the International Monetary Fund (IMF), World Bank and other multilateral agencies is also a part of the normal route. The longer it takes to approach the multilaterals, the more aggressive and painful the likely recommended corrective fiscal strategy.

The positives

The Government is targeting a primary surplus of $276 million or approximately 2.3 per cent of GDP. Current transfers, a major concern for the rating agencies, are projected to decrease by $29.3 million or 2.5 per cent to $1.1294 billion.

Concerns

There is projected to be a 5.8 per cent increase in total expenditure compared to 2016/17. Government revenue is projected to increase by 4.7 per cent; when debt repayments in the form of amortisation of $1.1265 billion is taken into account, an overall deficit of $422 million on the cash basis is expected. This represents a deficit of 4.4 per cent of GDP. A more aggressive stance is needed to curtail the growth rate of its debt – a targeted deficit of 4.4 per cent of GDP represents a reduction compared to fiscal 2016/17.

Before his dismissal, former Central Bank Governor Dr DeLisle Worrell in January, 2017, called for a further reduction in wages and transfers to eliminate the deficit as well as eliminate central bank financing. The Minister of Finance Chris Sinckler, however, made it clear that attrition and public sector reorganisation would be the strategy going forward to reduce wages rather than any cuts to the size of the public sector.

The Bajan Government seems to be relying heavily on asset sales to narrow the deficit. This approach is criticised because the Barbados government seems to have a weak track record of execution as evidenced by recent attempts. The sale of the Barbados National Terminal Company Limited should have been finalised about a year ago.

There are also issues in terms of the timely streamlining of the finances of state owned enterprises. Transfers to these entities continue to weigh heavily on fiscal resources despite the reduction in the 2017-18 Budget.

Confidence in the Government may have been eroded with the firing of Worrell. The timing of the dismissal could not have been worse given the current challenges facing the Government and their tapping of the Central Bank to fund expenditure. Barbados may need IMF intervention and delays to seek assistance could worsen its situation.

Prime Minister Freundel Stuart, has also noted that the country will not be going to the IMF, at least not now, based on the circumstances. The point was made by former Barbados Prime Minister, Owen Arthur, that the country had no option but to go to the IMF.

Conclusion 

From a regional perspective, Barbados has an enviable per capita GDP at US$15 800 based on a 2016 estimate which means the average Bajan is three times as rich as the average Jamaica, Guyana, Belize and Dominican Republic citizen.

Barbados is one of the most highly educated sovereigns in the region; the country has an enviable literacy rate, the Government offered free education up to the tertiary level until recently, the infant mortality rate is low and Barbados is one of only a handful of countries listed in the high human development category.

Despite these lofty heights, things have taken a turn for the worse. The debt/GDP ratio has climbed from 80 per cent in 2011 to an estimated 118 per cent in 2017. Persistent fiscal deficits, averaging above five per cent since 2012, have ballooned the debt.

The authorities were slow to pick up the severity of the crisis and when they did act to increase taxes, it was done in a piecemeal fashion and did not have the desired effect. With the debt growing, the interest burden (interest payments as a percentage of revenues) has climbed above 15 per cent and represents a burden on cash resources.

The situation was further escalated by the poor performance of tourism and financial services which depend on external factors. The global financial crisis, the European financial crisis, Greece, Brexit and the uncertainty surrounding ongoing negotiations have weakened visitor travel plans – negatively impacting tourism. Successive downgrades have also proven a challenge prompting some businesses to relocate given the loss of investment grade status.

Recommendation 

The probability of a downgrade at this time, based on the rating is 50:50. The above leaves us with no option but to maintain our sell recommendation.

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