EDITORIAL - The effects of downgrades
Last week, New York-based credit rating agency, Standard and Poor’s issued what is only one of a number of downgrades to the sovereign credit rating of our country over the past decade. Barbados’ long term credit rating was dropped from a rating of CCC+ to CCC with a negative outlook.
This has caused commentary from financial analysts and economists across the country, as they reflect on the further impact that these downgrades will have on our fragile economy.
A rating of CCC means there is a vulnerability to non-payment of debt instruments and in order for the issuer of these instruments to meet its financial obligations, there will have to be favourable financial and economic conditions.
While a credit rating is merely an opinion, it serves as a useful measure of relative credit risk for investors, banks and insurance companies in their investment decisions. It also provides a financial and economic measure for comparison with other countries’ credit worthiness. The part played by credit ratings in the determination of the interest rate to charge countries is based on the level of perceived risk which the rating attempts to measure. A downgrade of a country will trigger a downgrade of corporations domiciled or incorporated within that country. Corporations operating within the downgraded country but not domiciled there are also affected, as the downgrade represents a country risk which must be managed. It can be seen therefore that downgrades have far reaching effects throughout the economy.
The effects that downgrades can have on businesses was evidenced by the relocation of Sagicor Financial Corporation from Barbados to Bermuda last year. After a series of downgrades, Sagicor found itself in a precarious position. This is due to the fact that certain corporations can only be issued with a credit rating at a maximum of two notches above the rating of their country of domicile, irrespective of their financial position. Insurance companies are legally required to invest in government bonds and other debt instruments of their country of domicile, which further increases the risk of exposure to the economic conditions. As a result, Sagicor opted to change its country of domicile and do a complete corporate restructure in order to avoid being downgraded.
Sagicor is but one example, as corporations across different sectors can be affected. As the cost of borrowing money becomes more expensive, companies may be forced to pass on the costs to the average consumer in order to recoup their expenses.
The critical factor in improving the credit rating needs to be the emphasis on sustained fiscal constraint. While this requirement is one that has been recognised by our government, continued and timely measures must be enacted to lift the pressure on the availability of deficit financing by our country, and the ability to raise capital in the international arena for both country and corporations.
Our current administration is in the process of drafting what has been described by Minister of Finance Christopher Sinckler as the Bold Sustainable Recovery Plan 2017, aimed at steering us through these difficult financial waters; it is hoped that this plan will be best strategy for Barbados.