Monday, 26 September 2016

Barbados Credit Rating Goes Down

International credit rating agency, Standards and Poors (S&P), has lowered its long-term foreign and local currency sovereign ratings on Barbados to B- from B.The global ratings agency says the outlook for the island is negative.

In a statement on Friday, S&P said over the last several years, the government’s financial profile has been eroded “because of persistently high fiscal deficits, reflecting both budget slippage and unbudgeted spending.

“The agency noted that the central bank continues to finance the government “Which we consider at odds with its goal to defend Barbados’ long standing currency peg with the US dollars” the report added that the “deficits, coupled with current account deficits not fully financed by foreign direct investment (FDI), have increased the country’s external vulnerabilities”.

However S&P said while economic growth should pick up during the next two to three years, there is “lacklustre private-sector confidence, continued delays in several tourism projects and potential spill over from Brexit” and this should keep growth moderate.

“We expect per capita GDP growth to be around 1 per cent in the next two years, comparatively low for a country at its level of income. The country’s per capita income, projected to be almost US$16,000 in 2016, is higher than that of most of its rating peers. That said, Barbados’ economy and the sovereign credit rating benefit from a low level of perceived corruption and a generally stronger political system and institutions than most of the sovereign’s peers in the ‘B’ rating category.”

Concerning the level of debt, S&P said this is a “key credit constraint, particularly given Barbados’ narrow, open economy (which depends highly on tourism) and fixed exchange rate regime” adding that the government continues to run arrears, which the International Monetary Fund estimates at 5.9% of GDP last fiscal year, up from the 4.3 per cent the year before.

The agency says it expects continued low commodity prices over the next two to three years and some pickup in tourism arrivals, especially from the United State.

S&P said that with GDP per capital at US$16,000, Barbados is still one of the richest countries in the Caribbean, however, growth has been below that of peers with a similar level of economic development, and the economy is very dependent on tourism.

“These factors weigh on the strength of the economy. There have been anecdotal signs of some pickup in growth–as tourism has improved–and we expect real GDP to post small but consistent gains during 2016-2018.”

S&P concluded that the negative outlook for the island reflects the potential for a downgrade if the government fails to make additional progress in lowering its high fiscal deficit, if growth resulting from key investment projects fails to materialize, or if external pressures worsen because of persistent and large CADs.

“This scenario would likely lead to a further deterioration in the availability of financing for large fiscal deficits during the next 12-18 months. We could revise the outlook to stable within the next 12-18 months if the government succeeds in stemming further slippage in its fiscal accounts , be it from implementation of fiscal measures or a stronger-than-expected rebound in growth, improves its access to financing, especially from private creditors locally and globally, and stabilises the country’s external vulnerabilities,” the agency said.