Ratings agency concerned about debt and no growth

The international ratings agency Standard & Poor’s says while positive improvements are being made, Barbados’ fiscal adjustment programme has not gone far enough.

Reacting to this week’s Central Bank report, S&P’s lead analyst for Barbados, Richard Francis, said the island was still some way off in terms of economic recovery, while warning that the authorities would have to implement additional measures to achieve the targets set out in the 19-month programme, which is due to come to an end in March.

“The good thing is that the Government has embarked on a fiscal adjustment strategy and it is yielding some results,” Francis told Barbados TODAY.

He pointed out that while foreign exchange reserves had stabilized, the fiscal consolidation measures were still off target.

Furthermore, he said, “there is no growth, which is something that I think needs to happen in order for Barbados to work itself out of the problem which we have seen for the last few years”.

In its release issued on Tuesday, the Central Bank said the Fiscal Adjustment Programme already had the effect of restoring the island’s foreign reserves to $1.66 billion or the equivalent of 15 weeks of import cover, as at the end of September.

However, apart from the lack of growth, Francis said another area of concern was the country’s high debt, which up to the end of September stood at 75 per cent of GDP, up from 67 per cent at the end of last year.

He stayed clear of saying whether the Government’s strategy was the right one for the country but highlighted shortcomings that have been hindering a turnaround.

“It [fiscal adjustment strategy] is not sufficient in order to arrest the increase in the debt to GDP ratio because you can see the debt to GDP ratio [has] climbed. It has been sufficient, it appears, to stabilize the international reserves, which is actually a very key factor for Barbados and the [currency] peg. But it’s not enough on the fiscal side to stabilize the debt to GDP and they are not completely on target so that you need to take further measures to bring this relatively high debt down to a more sustainable level.”

The financial expert was also not satisfied with the level of Government revenue, which he noted posted no real increase.

“Clearly one of the things that we have seen over the past few years is the underperformance on the revenue side and you continue to see there has been some stabilization, but certainly not an increase in terms of revenue. In fact, indirect taxes have fallen [and] it seems that the Government has been better able to make come corrections on the expenditure side.”

With these factors in mind, the S&P official said a strong case could be made for the Government to revise the 19-month programme, while warning that on its current track targets would remain out of reach.

“If the programme stays on its current track they won’t reach the targets. I am assuming, as the Governor indicated, that there will be additional measures to meet targets. Whether that will be sufficient I can’t say, but it’s pretty clear that they do need to make further measures to meet the fiscal targets.”

Governor Worrell warned that further revenue enhancement and expenditure adjustment equivalent to two per cent of GDP will be required in the second half of the fiscal year to meet the target deficit of 6.6 per cent GDP.

While maintaining predictions for low growth this year, Francis stressed the need for a clear and sound plan from the Government to further reduce the deficit in the next fiscal year.

And with S&P due to issue its next report on Barbados in December, Francis said there was currently a “one in three” possibility of a further downgrade, depending on the island’s performance in a number of areas.

“Some of the things that we are going to be looking at are whether the Government will be more in line with its fiscal targets; the level of international reserves; the outlook for the hotel projects; and especially a return to growth.

“I think those are the key factors that we are going to be looking at and we will have a review by the end of the year,” he told Barbados TODAY.


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