Moody’s downgrades Barbados’ credit rating
Barbados’ credit rating has been downgraded again. This time by Moody’s Investors Service, to Caa3, bringing it in line with the recent downgrade by Standard and Poor’s last Friday.
However, a silver lining, is that Moody’s has maintained the stable outlook for the island’s long term outlook, which puts it at odds, with the negative outlook imposed by Standard and Poor’s. The agency, in its rationale for maintaining the stable outlook, was the expectation that Government would adopt “a credible fiscal consolidation programme to arrest the rise in debt-to-GDP ratio and put debt on a sustainable downward trajectory”. Part of the belief was that Government would find a way to reduce its reliance on “short-term debt and financing from the Central bank, and a rebound in international reserves”. It stated that there was a high probability that of a “credit event in the next 2-3 years”.
Moody’s, in its reasoning for the latest downgrade, cited challenges which the island was having with its increasing Government debt and what it termed was “very limited prospects of fiscal reform”. These issues were compounded by “rising domestic and external financing pressures that are very likely to impair the government’s ability to service its debt”. This, it was argued, has increased the debt burden and the credit risks for the island.
It conceded that while macro-economic conditions had eased or improved in the country, aided by tourism primarily, reform efforts to drive down the debt burden had not gone far enough.
It cautioned that Government had accumulated high arrears to the private sector and to the National Insurance Scheme. The Moody’s report pointed to challenges with external pressures which impact the Government’s ability to deal with the challenges. “A number of factors, in particular maintaining the peg to the US Dollar, caused the stock of international reserves to drop significantly last year coming to USD 340.5 million in December from USD 463.5 twelve months earlier. This is the lowest level of reserves recorded since 2009, and only half the average level observed between 2009 and 2012, equivalent to under 11 weeks of imports at end-2016, compared to 13.6 weeks and 14.7 weeks in 2014 and 2015, respectively. The persistent decline in reserves continues to pressure the exchange rate peg. Rising refinancing pressures dominate more positive credit features. Those include Barbados’ moderately strong institutions, high governance indicators relative to peers, and stable political system that has historically supported a high degree of policy consensus. The government debt structure has relatively limited exposure to exchange rate risk with less than 30% of government debt denominated in foreign currency. The sovereign rating is also constrained by relatively weak growth compared to peers, and by the significant fiscal challenges.”
Government is set to start debate on the 2017/2018 Estimates of Revenu
e and Expenditure from Monday, March 13 at 10am, when Minister of Finance and Economic Affairs Christopher Sinckler is expected to outline Government’s proposed spending and strategies for dealing with the financial issues for the next Financial Year which starts on April 1. Government indicated this week that it anticipated a 4.4 per cent deficit which will be below the deficit of 5.1 per cent which is expected at the end of the current fiscal year at March 31, 2017.
Government’s total expenditure for the coming financial year, on the accrual basis, will be $4 549.5 million. When converted to the cash basis, total expenditure is $4 486.7 million, an increase of $246.0 million or 5.8 per cent over the revised figure for 2016-2017.
The repayment of principal and interest on Government’s debt is expected to account for $1.8 billion compared to the revised projection of $1.7 billion.
On the accrual basis, current revenue for the next fiscal year is projected at $2 963.2 million. On the cash basis, current revenue is projected at $2 938.2 million, an increase of 4.7 per cent over the revised revenue of $2 806.9 million for the financial year ending March 2017.