Further erosion of foreign reserves puts Barbados dollar in danger – Moody’s

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BRIDGETOWN, Barbados, July 23, 2014, CMC – With Barbados’ foreign reserves standing below the 2013 level, International credit rating agency, Moody’s has warned that strain could be put on the dollar.

“Any further erosion in reserves would likely put further pressure on Barbados’ currency, which is pegged to the US dollar,” Moody’s stated in a July 21 report.

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The agency issued its analysis based on the Central Bank of Barbados’ fiscal first quarter report issued on July 15.

The analysis is titled, ‘Barbados’ Mounting Fiscal Challenges and Persistent Economic Weakness Are Credit Negative’.

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“After recovering slightly during the previous three quarters, foreign exchange reserves have resumed their decline, and as of 30 June remained around 25 per cent below early-2013 levels,” Moody’s noted. “This decline occurred despite a slight recovery in long-term private financial inflows that traditionally help support the central bank’s international reserves.”

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In its July report the Central Bank set Government’s financing needs for the remaining three quarters of the current fiscal year at BDS$300 million, to be financed by commercial banks, NIS, and other non-bank organisations.

But stating that the fiscal first quarter, ended in June, was an important test for the government’s ability to deliver its deficit reduction program introduced in August 2013, Moody’s raised the level of Government’s estimated financial needs.

Any further erosion in reserves would likely put further pressure on Barbados’ currency, which is pegged to the US dollar

“Given the larger budget gap in the last fiscal year, we now estimate that the authorities need a total adjustment of at least BD$450 million (5.2 per cent of projected 2014 GDP) to reach their deficit objective in the current fiscal year,” Moody’s stated.

Moody’s stated that although it expects Barbados’ fiscal consolidation to accelerate over the next three quarters, “it will remain constrained by revenue underperformance, difficulty reining in transfers and subsidies and rising interest costs.

“Consequently, we are adjusting our 2014 budget deficit projection to 8.5 per cent of GDP from 8.0 per cent, about two percentage points above the government’s target, with risks firmly tilted to the downside.”

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