Moody’s downgrades Barbados over debt concerns

But the Central Bank insists the debt burden is under control.

BRIDGETOWN, Barbados, Wednesday June 15, 2011 – Credit ratings firm Moody’s Investors Services has downgraded the Barbados government’s domestic debt rating, although keeping the foreign currency debt rating steady, over concerns about the country’s debt burden.

But the Central Bank has responded, saying that the government has the debt under control.

Moody’s knocked the domestic debt rating one notch down, from Baa2 to Baa3, bringing it to the same level as the foreign currency debt rating. It also said the outlook on both ratings has been revised to negative, indicating that those ratings could be lowered in the next 12 to 18 months.  

The ratings agency said Monday that one of the main triggers for the action was “increasing concerns about the capacity of the domestic market to continue to absorb the elevated levels of government debt issuance at the same time that the country's already large current account deficit is expected to increase further due to the recent rise in oil prices”. 

The other reason, Moody’s said, was its belief that the government's debt ratios are likely to deteriorate further over the next 12 to 18 months to levels that are no longer consistent with an investment grade rating, given the small size and limited diversification of Barbados' economy.

However, in a statement issued yesterday, the Central Bank of Barbados said that while it agrees that increasing financing pressure has been placed on the local financial market, “it remains confident that the market can accommodate the current and projected levels of Government debt issuance”, given the level of liquidity in the market and the continued strong demand of institutional investors for domestic Government securities.  

“Moreover,” it added, “the amortization profile for Government’s domestic debt portfolio is relatively smooth, with maturities mostly at the longer end of the maturity spectrum, which aids in ensuring that the domestic debt-service burden is not too onerous.”

The Central Bank also noted that based on Government’s continued commitment to consolidate its fiscal position, which should be reflected in a lowering of the debt burden in 2012, the volume of net new financing from domestic entities is also expected to decline in the medium term, as reflected in Government’s Medium Term Fiscal Strategy.

“The sustainability of Government’s efforts at fiscal consolidation will be conditioned by the gradual economic recovery that has already begun to take shape, coupled with gains from the revenue measures cited in the November 2010 Estimates and Budgetary Proposals,” it said. 

“It is supported by an effective coordinated mechanism for monitoring the fiscal performance, which allows for the application of timely corrective measures.  This is consistent with the proactive way in which Barbados has approached the recent economic challenges.”

The Central Bank added that in spite of rising oil prices, there remains no doubt about Government's ability to repay its foreign debt obligations, given that international reserves are currently in excess of 20 weeks of imports.

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