S&P downgrade of Barbados is extremely damaging

Peter N. Boos FCA

BRIIDGETOWN, Barbados, Monday July 30, 2012 – The recent S&P downgrade of Barbados is extremely damaging to Barbados and its hard earned reputation as a well managed economy.

Countries in the top tier of economic management with high investment grade Sovereign Credit Ratings (provided by S&P, Moody’s, Fitch etc) attract the greatest interest from investors, the ultimate source of wealth creation.

Countries with low ratings, including Barbados, are shunned and as a result attract high borrowing rates from financial markets. This phenomenon worsens a country’s fiscal position as higher interest rates eat up more of National revenues than would otherwise be available for expenditure on social services, infrastructure, health and education etc.

The important observation by S&P is that Barbados’s problems are not solely related to the very weak global economy.

To quote S&P:
The downgrade reflects our opinion that Barbados’s economic fundamentals continue 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.

As with individuals, reputation (your brand), is everything. Barbados has now been relegated to the third division in football parlance. Fewer will want to extend credit to us and those that do will ask a higher price. We must all keep a close look out now for the sharks that swim in such murky waters with promises of pots of gold. There are some memorable recent examples.

Peter BoosUnless we focus on tackling the long term structural changes we must make to be globally competitive, Barbados will continue to decline, unemployment will rise, investors will look elsewhere (as some are already), we will see a flight of human and financial capital and social instability will ensue.At some point too, this lack of confidence will translate into pressure on our exchange rate.

The role of the Barbados Central Bank in all of this is important. That Institution must be credible and seen to be independent of political interference.

For some time now the NIS Funds have been used inappropriately by Government to fund recurring expenditures.Both the IMF and S&P have alluded to this in recent reports.

The S&P downgrade will only encourage Government to borrow even more from the NIS to pay its bills at artificial rates unobtainable in the financial markets.
This is bad policy and is unsustainable.

The NIS Fund is a fiduciary fund and should be managed independently of Politicians by professional investment managers appointed on behalf of the Fund’s beneficiaries i.e. the contributors to the Fund and in compliance with appropriate Investment Guidelines.

The Social Partnership Of Barbados and other key stakeholders, NGOs, The Opposition etc. should consider this a priority pillar of future confidence and stability.  Click here to receive free news bulletins via email from Caribbean360. (View sample)

The opinions expressed in this commentary are solely those of Peter Boos.