CIBC confused by downgrade
The Freundel Stuart administration can take some comfort from a position paper produced by CIBC Capital Markets in response to the latest Moody’s downgrade of Barbados’ bond rating.
In the document circulated to investors, the Canadian-headquartered financial solutions company described the downgrade as “unwarranted and confusing”.
It admitted that it was not comfortable with the Central Bank’s financing of the fiscal deficit, and that it was not surprised at the downgrade following Moody’s previous negative outlook “and insufficient progress to date in stabilizing debt ratios”. However, the financial institution said the downgrade was unjustified in light of what the ratings agency had indicated earlier.
A week ago, Moody’s Investors Service downgraded the country’s bond rating and issuer rating to Caa1 from B3. It also changed the outlook to stable from negative, citing slow progress in achieving debt-sustainable fiscal consolidation; low foreign exchange reserves and weak financing conditions.
CIBC Capital Markets noted that the latest decision followed a triple-notch reduction in June 2014 and the maintenance of their negative outlook, which represented “a more than 33 per cent chance” that Moody’s would downgrade Barbados’ credit rating over the medium-term.
It also recalled that in December 2015, Moody’s indicated that another downgrade was likely if the country faced a trade-off between debt servicing and maintaining the currency peg, given past evidence of the Central Bank’s financing of the fiscal deficit.
“Bottom line, although we are not comfortable with the Central Bank financing fiscal deficits, we find this action unwarranted and confusing. We also do not see from their analysis the so-called trade-off, because the countries with more flexible exchange rates have on average defaulted more times, not fewer. Moody’s is saying that Barbados will almost surely default, and is putting the onus on its fixed exchange rate,” said the document, a copy of which was obtained by Barbados TODAY.
CIBC Capital Markets predicted that the downgrade would likely increase Government’s cost of borrowing internationally, but that the probability of currency devaluation remained low because of adequate foreign exchange reserves.
“And as we have elaborated elsewhere, the external accounts have adjusted into the region of strong solvency. Moreover, external debt as a percentage of total debt is low, and the Government has access to other, more favourable policy options. These include access to concessionary multilateral financing, request of funds in the context of an official International Monetary Fund (IMF) programme, expensive short- to medium-term financing similar to the 2013 Credit Suisse facility, and additional fiscal contraction to curtail domestic demand for imports,” it said.
The authors insisted that the island’s rating was not worse than BB, arguing that Moody’s latest rating was “exceedingly low for a country that has never defaulted”.
They stated that Barbados had found itself in the same rating bracket as “serial defaulters” Belize (Caa2 with a stable outlook) and Jamaica which is rated Caa2 with a positive outlook.
The writers also made the point that the IMF forecasts suggested that Barbados’ short- to medium-term economic growth prospects appeared weaker than both Belize and Jamaica.
The CIBC Capital Markets document said Barbados’ projected nominal fiscal deficit was larger as a percentage of Gross Domestic Product (GDP) than its counterparts, and that at 26 per cent, the 2014/2015 interest expense/revenue was only marginally better than Jamaica’s at 30 per cent for Jamaica and Belize nine per cent.
“However, the projected debt/GDP ratios and external current account balances are on par, even when taking into account that both Jamaica and Belize are coming off significant debt restructurings. Finally, Barbados’ external debt as a percentage of total outstanding gross Government debt is lower . . . but so are its foreign exchange reserves [13.8 weeks of import cover for Barbados compared to approximately 22.5 and 23.5 for Belize and Jamaica respectively].
“The revision of the outlook to stable suggests little probability of a further downgrade, even if policy measures and economic indicators continue on their current trajectory,” the document stated.
The analysts said the external current account deficit was “significantly” lower due to falling global oil prices and a boost in tourist arrivals from major source markets, and that cuts to personal emoluments, transfers and subsidies, and the imposition of additional taxes had helped improve the fiscal deficit.
“All these developments indicate improving sovereign creditworthiness, not deterioration.”
The financial solutions company observed that there continued to be major economic and funding challenges and that further debt accumulation was likely based on Government’s initial estimates for the current fiscal year, which suggested an increase in the nominal fiscal balance to five per cent of GDP.
“Significantly reducing the fiscal deficit will require some privatization of public assets and/or additional fiscal consolidation,” it concluded.