Stephen: downgrade was inevitable
President of the Barbados Economic Society Jeremy Stephen has said the latest downgrade by Standard & Poor’s (S&P) was inevitable, and was “very much in line with what [it’s fellow international ratings agency] Moody’s has been thinking about Barbados for some time”.
S&P yesterday lowered the island’s long-term foreign and local currency sovereign ratings from ‘B’ to ‘B-’, saying that Barbados’ fiscal adjustment has again fallen 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,” S&P said.
It added that the outlook on the long-term rating was negative, reflecting “a greater than one-in-three chance of a downgrade, if government is unable to lower its fiscal deficits, or if growth fails to strengthen, putting additional pressure on the country’s weakening external position”.
Stephen welcomed the focus on the persistently high level of debt, which continues to be a cause for concern.
“You’ve got some cases where interest expense is upwards of 35 per cent of tax revenue or more, and that is not a sustainable position.
“And still the Central Bank, though warned by the IMF to desist from funding the Government T bills the way it used to, or at least government financing or debt financing through the treasury bill market and other markets, it has continued to do so, I guess because of a lack of appetite from the commercial banking sector,” he said.
Stephen told Barbados TODAY the report was one of the first to cite a lack of private sector confidence as an issue, as according to him, “most people do know or are believing that the recovery that Barbados should have, that is with GDP growing from the one per cent that S&P is expecting, to about three per cent in about three years as they’re expecting, should be done on the back of private sector confidence”.
He also noted S&P’s concerns that it will become more difficult for the Central Bank of Barbados to defend the local currency peg of two to one to the US dollar if it continues to fund Government debt.
“It would be noteworthy at this time to recognize that the likelihood of interest rates being held internationally, or being held down internationally because of actions by the American Federal Reserve, interest rates should be expected to rise within the near future.
“This has been postponed and it is by the grace of providence that we haven’t necessarily been negatively impacted by global interest rates trending upwards, which would mean that not only sovereign or external debt may become more expensive in the future, it will,” Stephen said.
According to him, considering that most of the banks here are foreign-owned, and the Central Bank has liberalized the market for loanable funds, “even more so than given the foreign nature of these banks that we would inherit higher interest rates in the future, maybe for loans, who knows.
“But we still have a rather liquid banking system that one would hope could be deployed towards private sector use.”
However, the economist said “because confidence is so damaged, and Government guarantees are few and far between, I’m not even sure if Government will be able to finance or spur private sector investment the way it would like.”
Stephen is therefore hoping that the Freundel Stuart administration will able to reverse this position “in quick time”, as according to him, it makes it more difficult for Government to refinance debt if they so choose.