FULL STATEMENT: Ministry of Finance responds to Moody’s downgrade
The following is a statement by the Ministry of Finance and Economic Affairs on the latest ratings action by Moody’s Investors Service.
In its most recent review of Barbados’ credit rating, Moody’s Investors Service decided to downgrade Barbados’ credit rating from BA3 to B3. While we value and fully respect the views and opinions of Moody’s, we are of the view that in this instance, the agency has clearly overreached in its highly negative conclusions, rushed to judgement, failed to adequately take into consideration the nuances of the Barbados economy, and essentially undervalued the commitment of the Government and people of Barbados to make any necessary adjustments to protect our exchange rate and meet our financial commitments.
The change in credit opinion appears to have been heavily influenced by the fact that the actual deficit for 2013/2014 was 11% compared to 8% from the previous year. While, as Moody’s indicates, financing costs have increased, the expansion in the deficit was largely driven by a decline in the primary balance. As noted in the credit opinion, this was partly due to weaker than expected revenues for the 2013/2014 financial year.
What is not reflected, is that there was a significant increase in reported expenditures due to the fact that, as it prepared to embark on a more aggressive fiscal adjustment programme, in finalising the financial statements for the 2013/2014 and locking in a short-term strategy for dealing with arrears owed to suppliers to Government, we took a decision to bring to book a number of outstanding payments.
Some of these payments relate to prior year liabilities contracted by some State Owned Entities (SOEs).
This was a deliberate policy intervention by Government and would have increased the fiscal deficit by at least 2% of GDP. It would, however, ensure that the Government’s financing requirements were properly accounted for and covered. It was consistent with the advice given by the International Monetary Fund (IMF) in the 2013 Article 4 Consultation Report. This will not be repeated in the fiscal year 2014/15, as this was a one-off exercise.
As such, we are extremely confident that the fiscal targets outlined for 2014/2015 can be met with the fiscal programme outlined. The difference in deficit reduction between the Government’s and Moody’s forecast is 2% of GDP, which can be explained by this adjustment. If the Moody’s baseline scenario reported in the credit opinion is adjusted to reflect the one-time items brought to book in 2013/2014, it will be equal to the revised Government forecast.
The credit opinion also appears to have ignored the cuts in current spending and additional revenue raising measures, as well as the improvements in the external accounts. The Government is committed to the programme of fiscal consolidation, and is determined to be disciplined and stay the course.
The drastic change in credit opinion has been interpreted by some as evidence that the economic situation in Barbados has gotten worse over the last six months since the last Moody’s review. In the last six months, there have been a number of positive developments in the Barbados economy, which are difficult to reconcile with the notion that the economic situation in the country has gotten any worse.
Barbados’ foreign exchange reserve position has stabilised significantly following major losses last year, even with the injection of the 150 million dollar external loan. Reserves now stand at around 15 weeks of imports, above accepted international minimum standards. There is simply no empirical evidence to suggest that the dramatic changes experienced in 2013 will be sustained through 2014 and into 2015.
The external debt services requirements are still below 10% of foreign earnings, with a relatively flat and imminently manageable foreign debt service profile, and despite domestic financing pressures, available liquidity guards against presumed domestic credit events by Government. Barbados has not defaulted on any debt local or external.
In the last six months, the Government has entered into an agreement with a foreign firm for the construction of a US$240 million Waste To Energy Plant (all private equity); Sandals Corporation is expending $130 million on expanding one of its properties in Barbados, while agreeing with Government to purchase a second property at the old Almond Hotel site and spend over US$250 million of its own money to rebuild a new 500 room hotel there. With this development, Government will now no longer have to take on debt to finance this operation. Additionally, Government has recently approved the sale of the former abandoned “Four Seasons Resort Project” to a major international investor and that will trigger another US$250 million in foreign direct investment. All of these projects, plus others, including a new cruise terminal at the Bridgetown Port, are expected to start within the next six months to a year.
Over the last six months, Barbados continued to make strides in restoring the viability of its traditional economic sectors and in growing new ones, from the exciting work in tourism specialty events such as Top Gear, Gospelfest and the upcoming CPL, to positive expansion in the Alternative Energy sector.
These are all evidence of an economy building the platform for a positive recovery. Despite the ongoing economic challenges, we are hard pressed to find empirical evidence that economic conditions have gotten any worse in the last six months.
Over the last six months, the Government has forged ahead and even deepened its fiscal consolidation measures in an effort to rein in Government expenditure and boost its revenues. A recent review by an IMF staff team has confirmed this, indicating in their press release that the Government has implemented most of the announced budget measures.
Additionally, Government has forged ahead with the finalisation of the implementation of the Tax Administration Reform Programme with the establishment of the Barbados Revenue Authority (BRA); and a high-level independent Monitoring and Evaluation Committee (MEC) to oversee strategic reforms to the fiscal and management operations of key State Owned Enterprises (SOEs), while upgrading the internal Management Accounting Unit to execute the recommendations of the MEC, in conjunction with CARTAC, IMF’s regional technical body. Government has also initiated a comprehensive review of the domestic tax system which is being carried out by experts from the IMF Fiscal Affairs Department.
So that contrary to the assertions by Moody’s in its press statement, it is clear for all to see that considerable progress is being made with programme implementation.
However, even with the best of wills and the sincerest of wishes these measures need time to work.
We are confident that if we stay the course Government’s fiscal deficit will definitely come down significantly; just as it is true to say that Central Bank financing of Government’s deficit will equally recede. Evidence of this reduction has already begun for the first quarter of this calendar year. We expect that as the fiscal programme takes full root, this trend will continue.
Finally, a number of experts, including some in the ratings agencies, seem to have decided that a devaluation of the Barbados dollar is required and to want to drive policy in this direction. The Government is committed to the fixed exchange regime and will do what needs to be done to protect the Barbados dollar.
Neither the Government nor people of Barbados want a devaluation of the Barbados dollar, and as the Government, we are determined to do what is required to maintain the fixed exchange rate and honour our financial commitments.
The Government is committed to the programme of fiscal consolidation, and we are seeing major signs of renewed economic growth in Barbados. As a Government and a people, we will stand shoulder to shoulder and overcome the challenges we currently face.