THE ISSUE – Different views on ability to manage debt
What’s the real message from the Moody’s and Standard & Poor’s reports on Barbados?
Credit rating agencies provide guidance to prospective investors on whether they should entrust their money to various governments.
A sovereign rating attempts to quantify the creditworthiness of a government’s debt, mostly for international investors who are not familiar with the country, and aims to provide a comparison to other sovereigns.
In light of this, the recent report by rating agency Moody’s Investors Services could result in the Barbados Government having to pay a higher interest rate than usual if it decides to borrow on the international market in the near future.
In a move that surprised many, Moody’s downgraded the island’s domestic currency rating from Baa2 to Baa3 while it affirmed the Baa3 foreign currency bond rating.
The outlook on both ratings was revised to negative.
The agency identified two main triggers for its action. Firstly, it cited increasing concern about the capacity of the domestic market to absorb the elevated levels of Government debt issuance at the same time that the country’s already large current account deficit is expected to increase due to the recent rise in oil prices.
Moody’s also expressed the view that Government’s debt ratios are likely to deteriorate further over the next 12 to 18 months to levels no longer consistent with an investment-grade rating, given the small size and limited diversification of Barbados’ economy.
Also included in its rationale was the idea that Barbados’ limited growth prospects, a function of its deteriorating competitiveness and declining productivity, make it unlikely that it will be able to grow out of its debt burden in the near to medium term.
“We note that Government’s desire to defend the currency in the face of potentially increasing pressure on the fixed exchange could reduce its flexibility to try to avoid a default on the domestic currency debt by printing money,” the rating agency added.
Meanwhile, Standard & Poor’s (S&P) affirmed the country’s BBB- rating and maintained a stable outlook.
S&P said Barbados has fiscal deficits that are large and unsustainable in the medium term, leading to a rising debt burden that is significantly higher than that of most of its BBB-rated peers. In addition, its small open economy is highly dependent on the United States and Britain.
It identified several strengths, however, including “political stability and strong governance reflecting mature political, judicial and economic institutions, a track record of proactive policy responses to previous economic crises and tripartite support for the Government’s current adjustment programme, [and] large surpluses at the National Insurance Scheme providing flexibility to fiscal accounts”.
S&P noted that Barbados is slowly recovering from the severe impact that the global financial crisis had on the country’s narrow and open economy.
“We believe that the economy has bottomed out and economic activity is now accelerating. Real gross domestic product increased by 2.8 per cent in the first three months of 2011,” the agency said in its report.
It noted that its stable outlook hinged on its expectations that the economic rebound will continue, which will help revenue collection, and that the external accounts will remain stable.
It added that erosion of the external balance sheet – including that related to deterioration in the fiscal trend – could lead to pressure on the currency peg.
In a factsheet released by the Central Bank on Barbados’ sovereign ratings, the Barbados Government is renowned for its stellar debt service reputation, having never defaulted on its debt, and is fully able and committed to servicing its obligations.
Nevertheless, it noted that international investors are sure to be more vigilant in observing Barbados’ economic performance going forward.
The bank noted that Government’s foreign debt rating has not been downgraded.
“Barbados’ international reserves are sufficient to service its foreign debt. Further, the proportion of the country’s expected foreign exchange earnings needed to service the external debt remains below ten per cent for the next decade, which is well within internationally accepted norms for debt service.
“As a result, the rating on Barbados’ foreign debt has not been changed for the year, since it is clear that Barbados has sufficient reserves to service its foreign debt,” the Central Bank said.
The Bank added that the debt which Government owes to non-governmental institutions and individuals is 56 per cent of GDP.
“While it is true that Government bonds and other debt obligations amount to over 100 per cent of GDP, much of this debt is owed to the NIS and institutions owned by Government, and there are deposits which Government holds that combined offset some of the debt owed to private firms and individuals. Government borrowing in the private sector is therefore no more than 56 per cent of GDP, which is not overly burdensome.”
The Bank said Barbados’ commitment to the maintenance of the exchange parity is beyond question, and there are more than enough foreign exchange reserves to take care of the additional foreign exchange that may be needed to finance more expensive oil imports.
“However, it remains crucial to contain the fiscal deficit, in line with Government’s MTFS, in order to ameliorate pressure on the foreign exchange and ensure that there is no financing of Government by the Central Bank,” it added.
The Bank also noted that Moody’s report underscores the need for sustained fiscal constraint, as a critical factor for an improved rating and reflects the risks that Government already recognises, to achieving such.
“Namely, that with the economic recovery now taking root, it is challenging for Government to maintain the current level of spending while at the same time undertaking measures to maintain employment and the network of social support,” it said.