S&P downgrades Barbados again
Barbados has suffered another economic downgrade at the hands of the international ratings agency Standard & Poor’s (S&P).
In a release issued yesterday, S&P lowered its long-term foreign and local currency sovereign ratings on Barbados to ‘B-‘ from ‘B’, saying it was concerned that the island’s fiscal adjustment programme again fell short of stemming another increase in debt to GDP, which is already very high.
The ratings agency also issued a “negative” outlook for the island, while expressing worry that Central Bank financing of the Government’s deficit continues, exacerbating Barbados’ financial and external weaknesses.
“As a result, we are lowering our long-term foreign and local currency sovereign credit ratings on Barbados to ‘B-‘ from ‘B’,” S&P said.
It also said there was “a greater than one-in-three chance” of a further downgrade should the Freundel Stuart administration be unable to lower its fiscal deficits, or if growth fails to strengthen, putting additional pressure on the country’s weakening external position.
The development comes on the heels of the August 16 Budget presentation by Minister of Finance Chris Sinckler in which several tax measures were announced.
However, S&P said despite those measures, Barbados’ net general government debt is expected to continue to rise toward just below 100 per cent of GDP over the next three years up from 93 per cent in 2015.
Following is the full text of the S&P statement:
- Barbados’ fiscal adjustment again fell short of stemming another increase in debt to GDP, which is already very high and a key credit constraint.
- Central bank financing of the government’s deficit continues, exacerbating Barbados’ financial and external weaknesses.
- As a result, we are lowering our long-term foreign and local currency sovereign credit ratings on Barbados to ‘B-‘ from ‘B’.
- The outlook on the long-term rating is negative, reflecting a greater than one-in-three chance of a downgrade, should the government be unable to lower its fiscal deficits, or if growth fails to strengthen, putting additional pressure on the country’s weakening external position.
RATING ACTION On Sept. 23, 2016, S&P Global Ratings lowered its long-term foreign and local currency sovereign ratings on Barbados to 'B-' from 'B'. The outlook is negative. The short-term ratings were affirmed at 'B.' We also downgraded our transfer and convertibility assessment for Barbados to 'B-' from 'B'. RATIONALE The government's financial profile has eroded over the last several years because of persistently high fiscal deficits, reflecting both budget slippage and unbudgeted spending. The central bank continues to directly finance the government, which we consider at odds with its goal to defend Barbados' long-standing currency peg with the U.S. dollar. The government deficits, coupled with current account deficits (CADs) not fully financed by foreign direct investment (FDI), have increased the country's external vulnerabilities. We do expect economic growth to pick up during the next two to three years, but lackluster private-sector confidence, continued delays in several tourism projects, and potential spillover from Brexit should keep growth moderate. We expect per capita GDP growth to be around 1% 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. The government did not lower its fiscal deficit as much as we had expected last year, and we expect slow progress in lowering the deficit over the next several years. The fiscal slippage reflects poor implementation of various adjustment measures, which only became effective during the second half of the last fiscal year, as well as failure to meet targets for state-owned enterprises (SOEs). The general government deficit was 6.1% of GDP in fiscal-year 2015 (from April 2015 to March 2016), slightly above the 5.8% of the prior year; the general government deficit includes the National Insurance Scheme (NIS) surplus of 1.2% of GDP. Stricter control over expenditure at SOEs, some one-off revenues from the sale of the Barbados National Terminal Company, and the full impact of the fiscal measures announced in 2015 and 2016, should reduce the fiscal deficit (and change in government debt) toward 5% of GDP during 2016-2018. The management of SOE finances poses a risk to the success of the fiscal consolidation of the government, in our view. On [Aug. 16, 2016], the government announced additional fiscal measures and a midterm financial and economic review. This process updates the pro forma budget proposal laid out in March, with updated economic assumptions, and incorporates further planned fiscal tightening. Moreover, the government introduced a social responsibility levy (2% on imports except those for tourism, construction, and agriculture) to fund health expenditure and increased the bank asset tax to 0.35% (from 0.2%). Finally, the government plans to reduce transfers to SOEs during the next four years below BB$1 billion, where they have stood for the last five fiscal years, through improving its control on its SOE's expenditures and refinancing arrears. In our opinion, these measures will help reduce the annual increase in government debt to an average of 5% of GDP during 2016-2018 from the 6.5% observed in 2013-2015. However, we expect Barbados' net general government debt to continue to rise toward just below 100% of GDP over the next three years from 93% in 2015. We consider the level of debt a key credit constraint, particularly given Barbados' narrow, open economy (which depends highly on tourism) and fixed exchange rate regime. In addition, the general government interest to revenue burden is over 15% (this figure excludes interest payments to NIS). Moreover, 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% the year before. We assess Barbados' contingent liabilities as limited; this considers our view of the strength of the banking system with assets of the deposit-taking financial institutions at 170% of GDP. Consistently high CADs from 2011 to 2015, which averaged 10% of GDP, the absence of significant FDI flows-–coupled with the sovereign's decision not to tap global capital markets--underpin a steady downward trend in international reserves, which were $544 million at year-end 2015. Our expectation for continued low commodity prices over the next two to three years and some pickup in tourism arrivals, especially from the U.S., should keep the average CAD at a lower 7% of GDP during 2016-2018. Within the last 12 months, three major hotels have announced new investments on the island--the Hyatt, the Sam Lord's Castle project by Wyndham (which the China Exim Bank will finance as well), and the expansion of the all-inclusive Sandals hotel. This should boost FDI flows and finance around 80% of the projected CAD. Coupled with disbursements from multilateral organizations, this should ease the downward trend of the international reserves. However, usable international reserves, which we consider for assessing external liquidity, are even lower; we subtract the monetary base from international reserves because reserve coverage of the monetary base is critical to maintaining confidence in the exchange-rate regime. Barbados' usable reserves have been negative since 2013, and the position continues to deteriorate, in part because of the central bank's deficit financing, which has expanded the monetary base. We expect Barbados' gross external financing needs to be above 200% of current account receipts (CAR) plus usable reserves. We expect narrow net external debt to average around 40% of CAR during 2016-2018. Our external assessment also considers that net external liabilities of a projected 170% of CAR during 2016-2018 are substantially higher than narrow net external debt. Finally, we note that Barbados' International Investment Position has inconsistencies and is not timely. At almost $16,000 GDP per capita, 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. Largely as a result of a robust tourism sector, the economy posted 0.8% growth in 2015, above the 0.3% average of the previous five years. Tourism arrivals were up by 14% in 2015, led by the U.S. market; higher arrivals, however, have not translated to higher tourist per capita spend. This is likely because of low commodity prices and increased use of Internet platforms for room accommodation. Since its independence, Barbados has kept strong ties with the U.K.; it is still early to assess the full impact of Brexit on the island. The U.K. accounts for 36% of tourist arrivals, and Britons are the main nonresident buyers in the local housing market. The impact of the Brexit, if any, could be mitigated by reactivation of the construction sector following the announcement of major hotel projects and growth in U.S. tourism. We expect GDP growth of 1.5% during 2015-2018. OUTLOOK The negative outlook 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 stabilizes the country's external vulnerabilities. " (ENDS)