BRIDGETOWN, Barbados, Friday April 8, 2016 – International credit ratings firm, Moody’s Investors Service, has downgraded Barbados’ government bond rating and issuer rating and changed the outlook to stable because of high debt, among other factors.
It said its decision to downgrade the issuer and bond ratings to Caa1 and revise the outlook from negative to stable was driven slow progress towards achieving fiscal consolidation consistent with a sustainable debt trajectory, and a low level of foreign exchange reserves and weak funding conditions.
“Despite some progress to reduce the government fiscal deficit and contain pressures on foreign exchange reserves, macroeconomic and credit risks remain elevated in Barbados. Debt burden remains very high and additional fiscal consolidation is needed to reverse the rising trend in debt burden. Slow progress to narrow the fiscal deficit to sustainable levels continue to put pressure on foreign exchange reserves, placing the exchange rate peg at risk.,” Moody’s said.
Expanding on the issue of slow progress to fiscal consolidation, the ratings agency said that although economic conditions in Barbados appear to be stabilizing with the improved growth outlook and low oil prices, the recent and anticipated fiscal consolidation is unlikely to be sufficient to put the debt trajectory on a downward path.
“We project debt-to-GDP ratio to continue to rise over the next two to three years and will likely reach 110 percent of GDP by 2018 (excluding debt held by the National Insurance Scheme). Continued accumulation of government debt will slowdown relative to the past three years due to the expected pick-up in economic growth and the reduction in fiscal deficit; however these improvements will not be sufficient to put debt-to-GDP ratio on a sustainable path,” it said.
“After a five-year period of anemic GDP growth of 0.3 percent on average, we expect growth to reach 1.5 percent in 2016, driven by a recovery in the tourism and construction sectors. We expect the fiscal gap to narrow to around 5.5 percent of GDP in the year ending in March 2016, from a peak of 11.2 percent in 2013. Despite these positive developments, significant fiscal challenges remain over the rating horizon. Particularly, high debt overhang and large funding requirements are important rating constraints, in addition to the high interest burden, which consumes around 27 percent of government revenues.”
Moody’s said a continued fiscal consolidation to achieve a primary surplus of around 2 percent of GDP and a sustained recovery in economic growth would be necessary to stabilize the debt at the current level. Reducing the large debt overhang will require additional fiscal savings.
Zooming in on foreign exchange reserves, Moody’s said those remained under pressure after dropping by 19 percent in 2013.
It noted that the slow pace of fiscal consolidation continues to pressure Barbados’ reserve buffer, putting the exchange rate peg at risk.
“The government has increased its reliance on financing from the Central Bank of Barbados, while commercial banks reduced their exposure to the sovereign. The rapid increase in short-term debt since 2013 raises concerns about rollover risk, while short-term funding pressures remain in the face of the government’s large financing gap,” it added.
The stable rating for the outlook, meantime, reflects the risk of further deterioration in debt dynamics on the one hand, balanced by the prospect that the authorities will continue to reduce the fiscal deficit in the context of an improved external environment and more supportive economic growth.
Moody’s said the rating could move up if government accelerates its fiscal consolidation efforts, and puts the debt-to-GDP ratio on a sustainable downward trajectory, and the economy maintains higher growth rates.
Alternatively, it added, the rating may slide further if the government’s ability to service its debt worsens, or it faces challenges in rolling over maturing short-term debt. Renewed pressure on foreign exchange reserves and sustainability of the peg may also trigger a downgrade.