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S&P eyeing Barbados

Tony Best

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News of Barbados’ economic performance dominates the headlines, whether it is about the pace of economic growth, debt, unemployment, foreign reserves, inflation, fiscal deficits or credit ratings.
Olga Kalinina, a senior analyst at Standard & Poor’s (S&P), the rating giant on Wall Street in New York, who keeps her fingers on the pulse of the Barbados economy, was recently in the country meeting with Government officials and other interested parties. She was subsequently interviewed by NATION North American Correspondent Tony Best in New York.
You were recently in Barbados. What did you find?
Kalinina: We have Barbados on the BBB-minus rating and we assigned a negative outlook in November 2011. The current outlook in our opinion reflects the rising risks of further negative action if the country continues to record lacklustre growth . . . . What we have seen is that since 2011, the economic growth (projection) has been revised downwards, not just in Barbados but in many other Caribbean countries.
We see revenue performance has been better than expected in some areas and is still quite weak in the corporate income tax area, reflecting the very difficult situation of the private sector, including the offshore financial services sector. We also see that the Government has made important adjustments on the spending side. Therefore, the bottomline is that the fiscal deficit has been reduced substantially.
We understand the Government is preparing the Budget . . . . The VAT which was (previously) temporarily increased, that increase will be permanent as from June. It is clear, in our opinion, that the Government is trying to address a still very vulnerable and weak fiscal situation through different channels, and we are waiting for the Budget to see what other measures may be put in place for the next fiscal year.
Are you comfortable with what you have seen in Barbados when it comes to fiscal performance?
Kalinina: Obviously, the fiscal risks are remaining and they continue to put pressure on the rating, as our outlook indicates. So we need to see what measures would be put in place (in the Budget) in order to promote economic growth and address other structural weaknesses in the fiscal account.
We believe the Government is committed to improving its fiscal position. That may change the outlook back to stable or if we believe the measures introduced or the external environment is worse than the Government believes it is or worse than we expected it to be or the adjustment is not sufficiently timely, then the debt projection would continue deteriorating [and] that would put additional pressure on the rating.
Is the Government on the right economic course?
Kalinina: The Government is facing many challenges both on the economic side and the fiscal side. We also point out that the external pressures are rising. The general current deficit was negatively affected by rising oil prices and the tourism dynamic is not bright, to say the least, so that it impacts the inflow of services receipts. So, there are many outstanding risks the Government is acutely aware of. That is what is behind our current rating and outlook.
Are you pessimistic or optimistic about the outcome in Barbados?
Kalinina: Our pessimism or optimism is pretty much reflected in what we believe the potential trajectory of the rating might be. The negative outlook reflects that. There is a rising probability, I believe it is more than 30 per cent at this point, that there could be another downgrade because of an inability to stabilize the areas we are discussing. The negative outlook reflects our opinion that we may indeed lower the rating on Barbados over the next year.
Did the pace of economic decision-making make a bad situation worse?
Kalinina: What we are saying is that if the actions are not only swift enough but also if we see deviation from the original plan impacting our view and perception of the credibility of the Government, or reveals some new sources of weaknesses and vulnerability, that would impact the credit rating in our opinion.
How would you describe the debt profile of Barbados?
Kalinina: The debt has been rising and that has been the source of our concern. That was one of the primary factors . . . threatening creditworthiness over the past three, four years.
What would be the impact of an S&P downgrade?
Kalinina: The downgrade will move the rating from investment grade category to the non-investment grade, which has implications for certain types of investors. But, most importantly, it’s the market which is going to judge what the new interest costs may be. It’s not something on which we can be opining as to what the financial costs of the downgrade might be.
Is the current economic situation in Barbados putting the fixed exchange rate under pressure? In other words, would devaluation solve some of the country’s competitiveness problems?
Kalinina: The Government is extremely committed to the exchange rate regime [which] has served the country well. It has instilled predictability and the stability to the investment climate. As of now, we do see building up some external pressures, but the international reserves haven’t moved much over the past year. In terms of the reserves position, they still cover the number of weeks, months of imports but in any case, we don’t see imminent risk to the exchange rate position. I do believe the authorities are committed to maintaining the peg and it has served the country well.
Would devaluation of the Barbados currency make the island more or less competitive?
Kalinina: This is a very complicated issue and it doesn’t have an easy answer, yes or no. Certain things may improve, some exports may improve, but the debt, the foreign currency part of it, will become more expensive. So there is definitely not an easy answer as to the impact of a real devaluation
because it would be going in different directions, depending on the area you are analyzing.
What are the areas when it comes to competitiveness?
Kalinina: Productivity is important and wages are important.
What about the National Insurance Scheme (NIS), its strength and investment strategy?
Kalinina: The NIS is a source of strength at this rating level because of their ability to roll over domestic debt and provide financing when other financing sources may not be immediately available. From the point of view of the debt profile and debt management, this is a better situation than in other (Caribbean) countries where you have much larger reliance on more expensive external debt with a much less predictable ability to roll over debt. So, from this point of view, the presence of social security in their annual surpluses is something that counterbalances all other risks on the debt side.
What would the debt picture of Barbados look like? Would it be vastly different without the presence of NIS surpluses?
Kalinina: The profile of Barbados would look different if it didn’t have highly liquid large surpluses of the National Insurance Scheme balances. The debt profile would be more skewed towards external debt with no domestic sources of financing the way it is now in Barbados. I would argue that the rating would be different.
What’s your view of the NIS investment in the Four Seasons hotel project?
Kalinina: It’s too early to talk about the Four Seasons project right now. We have been discussing this project for two years. There are many stages to jump-start this project and the pace and timing of the steps taking place, I wouldn’t say slow because we didn’t have a particular timeline, but I would say they were behind the original schedule. So, that’s why I wouldn’t discuss the project right now before we see the approvals and that investors are on board.
We always indicated that if the project starts and if the investment support is there, it, of course, would be a significant positive development for the country which is yearning for positive news in the media. We see delays with these kinds of projects all across the Caribbean.
Is it a viable project?
Kalinina: We definitely wouldn’t comment on that.
How do you view the Central Bank’s projections for economic growth?
Kalinina: The Central Bank was saying growth would be somewhere around one per cent this year and it is what we (at S&P) have as our baseline growth projection in terms of real GDP (gross domestic product) for 2012. As we have seen in 2011, and as we are seeing, the external environment right now, there is risk of that number being revised downward. But as of now, this is our official projection.
Are you indicating that the projection for economic growth would be revised downward?
Kalinina: Remember that we started around two per cent for 2011 and then we ended up 0.4 per cent for Barbados this past year. It is obvious that the economy and the pace of recovery are quite slow. So, even though we do have our current assumption about the real GDP growth of one per cent for this year, it is possible that this may need to be revised downward.
Would it go into negative territory?
Kalinina: It is very hard to say. The economy was able to show very mild but positive growth in the past two years. It is early to speculate whether it is going to be another recession. That is not our base scenario as of now. We are now operating under one per cent GDP growth assumption.