S&P: Stable outlook for Barbados
Thursday June 16 2011 | 04:40 AM

BARBADOS’ sovereign Credit Rating has been reaffirmed as stable by major credit rating agency, Standard and Poor’s, with the country earning a rating of BBB-/Stable/A-3. This news clashes directly with Moody’s Investors Service which lowered its domestic currency rating on Barbados to the brink of junk on Tuesday to Baa3, the lowest investment-grade level.

In a report published yesterday, Standard & Poor’s expressed confidence in the country’s response to the effects of the global economic crisis and stated that it remained on a course to economic recovery. It also expressed support for the view that Gross Domestic Product (GDP) growth was expected to grow from 0.3 per cent in 2010 to two per cent this year and three per cent in next financial year. 

“After contracting in 2008 and 2009, the real economy rebounded slightly (by 0.3 per cent) in 2010. We believe that the economy has bottomed out and that economic activity is now accelerating. Real GDP increased by 2.8 per cent in the first three months of 2011. A pickup in tourism (arrivals and spending each grew by 7 per cent in the first quarter of 2011) as well as a gradual rebound in other private-sector activity should support the forecasted real GDP growth of 2 per cent this year and 3 per cent in 2012–2013,” said the agency in yesterday’s report.

Budget endorsed

The point was made that this island’s fiscal position, which had suffered in the recent past, had improved in 2010. This, the report stressed, was based on revenue generating measures taken by the Government in the 2010 Financial Statement and Budgetary Proposals. 

“The government introduced a series of revenue measures at the end of 2010, a decision that was in line with our expectations and underpinned our revision of the outlook on Barbados to stable from negative in October 2010. The measures included a temporary increase in the value-added tax to 17.5 per cent, the elimination of the tax-free allowance for travel and entertainment, an increase in the excise tax on gasoline, and other increases in fees/duties. These measures, together with ongoing restraint in capital spending and wages, have helped to narrow the government’s fiscal deficit,” it read.

Progress has been made with fiscal consolidation with more work still left to be done. “Overall, the general government fiscal deficit (including National Insurance Scheme [NIS] surpluses of roughly 2.5 per cent of GDP) is estimated to have declined to 5.6 per cent of GDP in 2010 from 7 per cent in 2009, and the forecast is for it to narrow further, to 4.6 per cent of GDP, in 2011.

“We expect that fiscal consolidation will be gradual (to 3.5 per cent of GDP in 2012 and 3 per cent in 2013) and that the general government debt burden likely will remain at about 55 per cent of GDP until 2012 (on a net basis) before beginning to subside in 2013. On the positive side, most of Barbados’ debt (60 per cent of the total) is in local currency and benefits from a favorable composition (45 per cent of the external debt is official) and a smooth amortization profile,” it continued.

Strengths & weaknesses

The report pointed to the strengths and weaknesses which this country faced when it came to presenting a rating. The strengths are political stability and strong governance, reflecting mature political, judicial, and economic institutions; a track record of proactive policy responses to previous economic crises and tripartite support for the government’s current adjustment programme. Also mentioned were large surpluses at the National Insurance Scheme, providing flexibility to fiscal accounts. 

The weaknesses highlighted are fiscal deficits that are large and unsustainable in the medium term, leading to a rising debt burden that is significantly higher than that of most ‘BBB’ rated peers and a small, open economy with high dependence on the US and the UK.

Caution

Concern was raised about the current account deficit and the challenges which will be posed by the uncertainty of global commodity prices. “Given the trend in commodity prices, we expect the current account deficit to remain elevated in 2011, at 9.8 per cent of GDP, and then subside gradually, to 7.8 per cent in 2012 and 7.1 per cent in 2013, as the economic recovery becomes more pronounced. Foreign exchange reserves rose in 2010 and covered more than 100 per cent of the monetary base. We expect them to remain relatively stable during the three-year forecast period,” the report said.

A further caution was given that improvement in the country’s ratings would depend on structural improvements in the economy. “The stable outlook hinges on our expectations that the economic rebound will continue, which will help revenue collection, and that the external accounts will remain stable. Erosion of the external balance sheet, including that related to a deterioration in the fiscal trend, could lead to pressure on the currency peg. If this were to occur, we would consider lowering our ratings on Barbados. Conversely, we would consider raising the ratings if the country’s economic prospects strengthen in a sustainable manner or if fiscal accounts show structural improvement,” the report stated.

Just on Tuesday, Moody’s Investors Service lowered its domestic currency rating on Barbados to the brink of junk, citing concerns about this island nation’s ability to absorb high levels of government debt issuance as the already large deficit is expected to rise.

The country’s rating was downgraded by one notch to Baa3, the lowest investment-grade level. The rating outlook on both the domestic and foreign currency ratings has been revised to negative, meaning both ratings could face a downgrade.

Moody’s said the downgrade considers the agency’s view that the primary credit strength that historically has enabled Barbados to achieve a higher rating than the country’s foreign currency obligations, namely the existence of a large captive market for domestic currency government paper, has eroded.

Meanwhile, Moody’s also said on Tuesday that the government’s desire to defend Barbados’ currency in the face of potentially increasing pressure on the fixed exchange rate could reduce the country’s flexibility to try to avoid a default on the domestic currency debt by printing money.