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Business Monday: Waiting for ratings
By Jewel Brathwaite
THE way the international rating agencies are behaving these days, one must indeed wonder what will be their say on the
fortunes of Barbados following the end of year economic review by this country’s Central Bank.
Having already have its outlook lowered from stable to negative by Standard and Poor’s, Barbados now awaits the next rating of its economic fundamentals.
The Barbados economy is in a recovery mode following the severe impact from the global recession. In the review given two weeks ago, the Governor, Dr. Delisle Worrell, pointed to some very encouraging signs in the economy, principally growth of under one per cent, a 35 per cent reduction in the fiscal deficit, and some improvements to the balance of payments.
While these do not suggest that Barbados is out of the fire, when taking into consideration the uncertain international environment, the numbers presented are very useful on which to build. These and other factors will determine to a large extent how the credit rating agencies will react.
Still receiving some harsh words for their failure to warn the world about the impending international recession which has created enormous economic damage around the world, the rating agencies have responded with something of a vengeance which seems apparently as an exercise to make up for loss ground. Earlier this month, they downgraded 14 Eurozone countries, France, Austria and Portugal among them, by moving their outlook from stable to negative, and the prospects of a further downgrade in the short to medium term.
There are at least five yardsticks which guide the actions of, for example, Standard and Poor’s in issuing sovereign ratings on a country. These are the Fiscal and Monetary positions, overall Economic fundaments, External, and Political. The fiscal position relates to the sustainability of a country’s deficits and debt burden; Monetary highlights how a country’s central bank is able to support growth and to steer an economy away from economic shocks; External is about the strength of a country’s currency since it is what investors are buying into when governments look to raise foreign financing; Economic is about the prospects for economic growth; and Political deals mainly with policymaking by governments and measures to maintain stability in public
Scores are assigned to a country based on how it performs with respect to these yardsticks.
The last occasion Standard and Poor’s had its say on the economy was in late 2011. While reaffirming their BBB-/A-3 local and foreign rating on Barbados, Standard and Poor’s revised this country’s outlook from stable to negative. That rating was based on the large fiscal deficit at the time, and the rising debt burden which Standard and Poor’s said was not sustainable.
As such, the International Rating Agency said that, “the negative outlook reflects our opinion that we may lower the rating on Barbados over the next year if the Government’s fiscal policies fail to
arrest the rising debt trajectory and if Barbados’ economic recovery is
To what extent therefore will the review presented by the CBB, keep Standard and Poor’s and its sidekick allies at bay?
The assessment by the Bank, the economic outlook, improvements to the balance of payments and the political environment, remain somewhat stable.
In the review it was revealed that the economy had registered growth of 0.5 per cent last year, slightly higher than the 0.3 per cent a year earlier. The fiscal deficit which has attracted considerable attention in since the onset of the global recession, was down to 4.8 per cent from 7.4 per cent of Gross domestic product at the start of Government’s current financial year. The economic outlook is for growth of about one per cent assuming the global economy to which Barbados is very heavily linked, improves this year.
Dr. Worrell has insisted that the fiscal deficit of 4.8 per cent of GDP is in line with the revised targets of Government’s Medical Fiscal Strategy (MTFS) which sets out policies designed to achieve a balanced budget by 2016/2017.
According to him, the fiscal strategy is sustainable, and because of a number of factors:
• the cost of servicing the external debt will absorb less than ten per cent of foreign exchange earnings for the remainder of this decade;
• there is no need to
refinance a major borrowing on the international financial markets until 2021;
• the annual interest cost of the total debt, domestic and foreign, is manageable at 22 per cent of Government tax and other revenues; and
• maturing domestic debt may be refinanced without difficulty because there remains considerable excess liquidity in the economy.
Some of the negative trends in the economy include rising debt, and higher unemployment and inflation, and the fact that some economic sectors – manufacturing and agriculture – are still not as robust as they should be.
The Governor said that the ratio of debt to GDP for all government, net of statutory corporations, is 47.3 per cent.
In the case of the latter greater efforts must be undertaken to stimulate these two areas. This has become a repeated issue concern even in times when there was no recession and the economy was limping along on the back of tourism, construction and wholesale and retail.
Apart from some of the improved fundamentals, Barbados could also take some comfort from the fact that last month CariCRIS, the regional information and credit rating agency, gave the island a very favourable rating.
One official told this paper on Friday that he sees no immediate problem as far as Standard and Poor’s is concerned. While this is good news, the sustainability of the recovery will be the key when such matters come up for consideration.