Downgrade!

BARBADOS’ Government bond rating has been downgraded to Caa1 from Ba3 by Moody’s Investment Services.

The latest downgrade comes weeks after Government, in the Estimates, indicated that progress had been made in stabilising the economy, and that it was embarking on a series of discretionary spending measures, including spending on completing upgrades to its water mains, and to implement desalination plants to combat ongoing drought conditions.

The report also interestingly enough revised the outlook to stable from negative. The downgrade was based on concerns over the slow progress towards achieving fiscal consolidation consistent with a sustainable debt trajectory. Also, concern was raised over what was perceived as a low level of foreign exchange reserves and weak funding conditions.

Moody’s actually praised Government’s efforts to reduce the fiscal deficit and contain pressures on foreign exchange reserves, macroeconomic and credit risks remain elevated in Barbados. It pointed to debt burden remaining very high and additional fiscal consolidation was advised to reverse the rising trend in debt burden. Slow progress to narrow the fiscal deficit to sustainable levels continued, in their view, to put pressure on foreign exchange reserves, placing the exchange rate peg at risk.

Moody’s maintained that despite low oil prices and previous fiscal consolidation measures which had been put in place from August 2013, that “the recent and anticipated fiscal consolidation is unlikely to be sufficient to put the debt trajectory on a downward path”.

The projection was made that debt-to-GDP ratio would continue to rise over the next 2-3 years, and will likely reach 110 per cent of GDP by 2018 (excluding debt held by the National Insurance Scheme).

“Continued accumulation of government debt will slowdown relative to the past three years, due to the expected pick-up in economic growth and the reduction in fiscal deficit; however these improvements will not be sufficient to put debt-to-GDP ratio on a sustainable path”.

The concern over the levels of foreign reserves was also addressed. The report stated that foreign exchange reserves remained under pressure, after dropping by 19% since 2013.

 “The slow pace of fiscal consolidation continues to pressure Barbados’ reserve buffer, putting the exchange rate peg at risk. The government has increased its reliance on financing from the Central Bank of Barbados, while commercial banks reduced their exposure to the sovereign,” the report added.

The recommendations included government accelerating its fiscal consolidation efforts, while putting the government debt-to-GDP ratio on a sustainable downward trajectory.

The response from the Opposition Barbados Labour Party (BLP) to the news was swift. BLP Candidate for Christ Church East Central, Ryan Straughn, stated that Government had failed in its stabilisation programme.

“This ‘fiscal consolidation’ programme has been led by the Minister of Finance and its success has been wide trumpeted by him, particularly in the latest debate on the Estimates of Revenue and Expenditure for 2016/2017. Barbadians should be aware that Moody’s basis for its ratings action was predicated on their estimate of the fiscal deficit of 5.5% of GDP.

“This is quite significant since the Minister of Finance presented a figure of 6.3% of GDP for 2015/2016 during the debate, but further rather than fiscal consolidation, the Freundel Stuart administration approved an Appropriations bill for a deficit of 7.8% of GDP for 2016-2017. Based on Moody’s analysis, this will set the country up for a further downgrade over the next 12 months or so,” he added.

Straughn took aim at the performance of Minister of Finance and Economic Affairs, Chris Sinckler.

“This is now the 6th ratings downgrade action by Moody’s since 2009, when the rating was A3. However, one must remember that in June 2014, under the stewardship of the Minister of Finance, Barbados received a triple notch downgrade in the middle of the Home Grown Fiscal Stabilisation and Economic Revitalisation Programme.

“Despite evidence to the contrary, the Minister of Finance and his colleagues persist in pursuing a path that takes Barbados closer to economic ruin.”

He also blasted the performance of the Central Bank and the overall economic policies of the Administration.

“This ratings action highlights the flaw in both the monetary policy of the Central Bank of Barbados by way of its continued direct financing of government, as well as the fiscal policy of the Freundel Stuart administration. In the face of such dismal failure, honourable people would resign,” he added.