Barbados debt issues not risky says central bank governor

(Photo: EPA/BGNES )

BRIDGETOWN, Barbados, Thursday July 19, 2012 – A shock move by the Wall Street-based credit rating agency Standard and Poors (S&P) has seen Barbados’s sovereign debt bumped down from investment grade to ‘junk’ bond status.

On Tuesday (July 17), S&P issued a release stating that it had lowered its long-term foreign- and local-currency sovereign credit ratings on Barbados to 'BB+' from 'BBB-' and lowered the short-term ratings to 'B' from 'A-3', but maintained the outlook for the country as stable.

However, Barbados officials have roundly opposed this downgrade.

In a press statement issued at a hastily called press conference the same afternoon, governor of the Central Bank of Barbados, Dr DeLisle Worrell, strongly defended Barbados’s international reputation.

“The downgrade says to the investment community that Barbados' foreign debt has become more risky, which is manifestly not the case,” he stressed.

In its announcement, S&P stated that it had assigned a recovery rating of '3' to Barbados's foreign-currency debt, which it said reflected their assessment that investors would have a 50%-70% chance of meaningful recovery on their investments if the government of Barbados defaulted on its debt repayments.

The credit rating agency explained that its downgrade reflected its opinion that Barbados's economic fundamentals continued to weaken.

“We believe this weakening stems, in part, from rising competitive challenges and other structural factors that the government can address only in the long term. In the short to medium terms, the difficult external environment will hamper the economic and investment outlooks. The resulting lower economic growth will hurt Barbados's fiscal and external accounts and will likely lead to further debt accumulation. Moreover, in our opinion, despite the government's focused efforts to bring down fiscal deficits, the fiscal stance remains qualitatively weak, as rising debt, off-budget spending, and contingent liabilities (in particular, CLICO) demonstrate,” stated the United States firm.

However, Dr Worrell refused to accept this explanation.

“Unlike countries like Greece, Barbados has taken painful measures to rein in spending and to live within its means. Even S&P acknowledges that Government has made focused efforts to bring down its deficit, during these challenging times. S&P’s own analysis therefore fails to justify its action in downgrading Barbados’ investments,” the chief economist told the media gathered at the bank’s towering Bridgetown headquarters.

In its rationale, the S&P stated that the stable outlook it gave really hinged on expectations that gradual fiscal adjustment would continue in order to stabilize the government debt burden, and that foreign direct investment would fund at least 60% of the current account deficit. However, it cautioned that erosion of the external or government balance sheet could lead to pressure on the currency peg. If this were to occur, S&P stated it would consider lowering its ratings on Barbados again. Conversely, the analysts projected that they would also likely raise the ratings if Barbados’ economic prospects strengthened in a sustainable manner or if its fiscal accounts showed structural improvement. Click here to receive free news bulletins via email from Caribbean360. (View sample)