S&P projects economic decline this year amid worry about Barbados' rising debt
The international ratings agency Standard & Poor’s (S&P) today threw another spanner in Barbados’ works by lowering this island’s long-term sovereign rating to “B” from “BB-”, while warning that the potential existed for a further economic downgrade.
The rather negative economic forecast came just in time for Christmas –– a time when Barbadians traditionally put their economic and other challenges aside.
The statement, which painted a gloomy picture of things to come, seemed to fly in the face of –– and even contradict –– the upbeat forecast delivered last Tuesday in Parliament by Minister of Finance Chris Sinckler in his Ministerial Statement on the economy.
Said Sinckler then: “Today I can say to the country that, based on actual performance and projections for the immediate future, we have not laboured in vain. Barbados is on a growth path once again! Our foreign exchange reserves have stabilized, our fiscal deficit is on a downward trajectory and economic growth is returning.”
However, while affirming its “B” short-term sovereign credit ratings for the island today, S&P lowered its transfer and convertibility assessment to “B” from “BB-”. The ratings agency also warned that the potential for a further downgrade existed “if the Government doesn’t succeed in bringing down its wide fiscal deficit, if growth boosted by key investment projects fails to materialize, or if external pressures of persistent current account deficits mount”.
“This scenario would likely lead to further deterioration in the availability of financing for large fiscal deficits,” the agency said.
On the other hand, S&P said it could revise the outlook to stable if the Government succeeded in reining in the deficit in line with its targets and maintaining access to financing, especially from private creditors.
“This in turn would help improve Government debt and interest burdens,” S&P said.
Note was taken of the Government’s intention to reduce the country’s deficit to between six to seven per cent of GDP by the end of March next year from 12.7 per cent of GDP in the previous fiscal year ended March, 2014.
However, S&P pointed out that “much of the fiscal savings have yet to be realized”.
“A key portion of the planned adjustment depends on reducing budgetary supplementals –– or requests for additional spending at fiscal year-end by public institutions –– that takes place at the end of the year.
“We expect some slippage from official fiscal targets, given the risks that much of the fiscal adjustment has not yet been executed. Moreover, the weak economy will weigh on revenue performance this year and next,” S&P said.
It further noted that an additional deficit reduction was projected for next year, which relied on higher growth and maintaining current revenue measures, in addition to further steps to widen the tax base and other austerity measures at public institutions.
“We expect the general Government deficit, which incorporates NIS [National insurance Scheme] surpluses that we estimate at about 2.3 per cent of GDP in 2014, to decline to 5.6 per cent of GDP in fiscal 2014 toward five per cent of GDP in fiscal 2015, from 10.1 per cent in 2013. This decline reflects the Government’s fiscal consolidation plan. However, risks remain from the sluggish outlook for the country’s main economic sectors, high unemployment, and potential spending pressures,” it warned.
Furthermore, S&P remains quite concerned about Government’s net debt burden, which is expected to rise to 89 per cent of GDP in 2014 and 92 per cent in 2015, up from 80 per cent in 2013 and 69 per cent in 2012.
In its statement, S&P pointed out that Barbados had used more than 15 per cent of general Government revenues to pay interest on its debt, excluding interest that Government pays on Government debt, which the NIS holds.
It further cautioned the Freundel Stuart administration of the need to press ahead with a comprehensive adjustment plan, while pointing out that the island’s economic fundamentals remained weak, “reflecting not only subdued global economic conditions, but also competitiveness and other structural shortcomings”.
In his statement on Tuesday, the Minister of Finance said: “When we consider the fact that at the beginning of this year with some predictions that our economy would decline by at least -1 per cent we feel a little more assured that recovery is around the corner with a now expected performance of between zero and 0.3 per cent in 2014 and a projected out-turn of growth of 1.5 to two per cent in 2015.”
However, pointing out that real GDP growth had declined on average 0.5 per cent per year since the onset of the global financial crisis in 2008, S&P said “this year, we expect the economy to decline marginally”.
“It [the Barbados economy] was flat through the third quarter, with tourism arrivals up only marginally during the first 11 months of the year. Only tourism from the UK (more than one third of tourists) has shown strong growth.
“Given the fiscal adjustment, we expect a contraction for the year as a whole. Real GDP growth should pick up next year to 1.2 per cent and move toward two per cent in 2016-2017,” S&P said.