Business Monday: Downgrade ‘unwarranted and confusing’

SERIOUS questions are being raised about Moody’s most recent downgrade of Barbados. They have come from CIBC Capital Market, which said it found the action by Moody’s as unwarranted  and confusing.

Two weeks ago, Moody’s Investor’s Service downgraded the Government of Barbados bond rating and issuer rating to Caa1 from B3, and changed the outlook to stable. Last December, it had indicated the likelihood of another downgrade once Barbados faces a trade off between debt servicing and maintaining the currency peg.

But in a paper circulated to investors, the CIBC Capital Market said that although they “are not comfortable with the Central Bank of Barbados financing fiscal deficits, we find this action (downgrade) unwarranted and confusing”.

“We also do not see, from their analysis, the so-called trade off, because the countries with more flexible exchange rates have, on average, defaulted more times, not fewer,” it said in the paper.

Acknowledging that Moody’s is saying that Barbados will almost surely default, and is putting the onus on its fixed exchange rate, the CIBC Capital Market stated that Barbados has never defaulted.Furthermore, rating agencies have reserved these single B and below ratings for serial defaulters, or countries just coming out of a default.

“We do not think Barbados’ credit is worse than BB and still recommended buying on whatever sell off we see,” it said.

It said that the rating action did not come as a complete surprise, although the level is exceedingly low for a country that has never defaulted.

According to the paper, “The Government of Barbados finds itself in the same rating bracket (Caa) as Caribbean sovereigns such as Belize (Caa2 with a stable outlook) and Jamaica (rated Caa2 with a positive outlook), both serial defaulters.”

Forecasts by the International Monetary Fund (IMF) suggest that Barbados’ short to medium term economic growth prospects appear weaker than both Belize and Jamaica. Jamaica is in a relationship with the International Monetary Fund.

Also, Barbados’ projected nominal fiscal deficit is larger as a per cent of GDP than its counterparts, and the 2014/2015 interest expense/revenue was only marginally better than Jamaica’s – 26 per cent for Barbados compared to 30 per cent for Jamaica and nine per cent for Belize.

It also said that the revision of the outlook to stable suggests little probability of a further downgrade, even if policy measures and economic indicators continue on their current trajectory.

CIBC Capital Market said that although Moody’s rating downgrade will likely “increase government’s cost of borrowing internationally, it does not represent a material change in our view about the sovereign”.

The probability of a currency devaluation in Barbados remains low, as foreign exchange reserves remain adequate, and the external accounts have adjusted into the region of strong solvency.

Other positives cited include low external debt, an improved external current account, and an improved fiscal deficit, which has been lowered from 11 per cent of GDP in fiscal year 2013 /2014 to about four per cent in 2015/2016 cent.