Moody’s downgrades Barbados again
Moody’s Investors Service has downgraded Barbados’ government bond rating by three notches to B3 from Ba3, while maintaining its negative outlook on the island.
In a statement issued yesterday, the rating agency said the three-notch downgrade reflects the reinforcement of negative fiscal trends given the increasing size of the country’s fiscal deficit, which exceeded 11% of GDP in fiscal year 2013/14, and “our expectation of continued challenges to fiscal consolidation”.
Moody’s, which had previously downgraded the bond rating to Ba3 from Ba1 last December, also highlighted the increasing government debt ratios, projected at above 100% of GDP by fiscal year 2014/15, coupled with elevated short-term debt issuance and gross financing needs in excess of 30% of GDP in 2014 and 2015.
The agency is further projecting “ a decline in international reserves this year, due to large current account deficits and weaker private sector inflows” as well as “Central bank financing of the fiscal deficit that will increase pressure on the country’s currency peg to the US dollar”.
In terms of the widening government deficit, Moody’s explained that the situation was driven by lower-than-expected revenues, linked to last year’s slight economic contraction.
“Despite the authorities’ recent efforts, expenditures remain high and rigid, particularly the public sector wage bill and transfers to loss-making public enterprises, and interest payments have increased significantly.
“The government announced several fiscal adjustment measures, including widespread public sector layoffs, but we think the authorities will be challenged to meet a deficit target of 6-7% of GDP in the running [fiscal year], given Moody’s projection of a GDP contraction of around 1% this year,” the statement said.
It noted that the Government’s debt burden had also climbed sharply and that debt affordability has deteriorated significantly.
“The debt-to-GDP ratio had risen to 97% as of March 2014 from 85% at the end of 2012, and interest payments now consume nearly 30% of the government’s revenues. These ratios are already among the highest in the B rating category, and we expect that government debt metrics will continue to worsen.
“Concomitantly, there has been a marked deterioration in the government’s debt profile given a significant increase in domestic short-term borrowings over the past several years. During 2013, two-thirds of the government’s debt issuance was short-term, reflecting the challenges the government faces in terms of placing long-term debt. Because of this, the government’s gross financing needs will be in excess of 30% of GDP in 2014 and 2015, when short-term debt is included,” Moody’s said.
Last December, international reserves increased due to a US$ 150 million bank loan received by the government.
As a result, Moody’s said reserves had remained relatively stable throughout the first quarter of 2014, in part because the government received an additional US$ 75 million bank loan in March.
“Nevertheless, at US $550 million reserves are roughly one-quarter lower now than they were at the end of 2012. As Moody’s expects a current account deficit of 8% of GDP in 2014 and private sector inflows to continue the downward trend they have exhibited since 2011, we anticipate international reserves will likely decline again,” the ratings agency warned.
It also pointed to increasing pressure on the Barbados dollar, noting that “part of the increase in the government’s short-term debt has been financed by the country’s Central Bank, a practice that became more prevalent last year.
“While supportive of government borrowing costs, such financing of the fiscal deficit pressures the country’s currency peg to the US dollar, long considered a critical element of Barbados’ economic policy framework,” Moody’s said.
As a consequence of its latest review, Moody’s has retained its negative outlook on Barbados, saying its expectation was that “the government will continue to find it difficult to meet its fiscal deficit targets owing to both weak revenues and expenditure rigidities, (ii) high levels of domestic short-term borrowing will continue to undermine the government debt profile and lead to increased refinancing risks, and (iii) continued central bank financing of the fiscal deficit will compromise authorities’ ability to preserve the currency peg.”
Moody’s has also adjusted Barbados’ local-currency bond and deposit ceilings to Ba3, its long-term foreign-currency bond ceiling to Ba3, and its long-term foreign-currency deposit ceiling to Caa1. The short-term foreign-currency bond and deposit ceilings remain unchanged at Not-Prime.