Of rating agencies and sovereign downgrades
In its 2013 general election manifesto, the policy platform on which Barbadians renewed its mandate for a second term, the ruling Democratic Labour Party (DLP) stated it was committed to building an “economically viable” Barbados.
“Why economically viable? In pursuing the goal of economic development, it is important that the economy be equipped with the capacity and the flexibility required to satisfy the many and varied needs of the population,” explained Prime Minister Freundel Stuart in the Leader’s Message on page 1 of the campaign document.
He added: “The presence of capacity and flexibility is the surest guarantee that ambitions for the economy will not outrun or outpace its capabilities. Viability ensures that we always set targets that can be achieved within the context of both our needs and our endowments.”
Over the past weekend, the news broke that Standard & Poor’s had yet again downgraded Barbados’ sovereign credit rating. This development, an unwelcome psychological setback for a country struggling to recover from seven years of economic decline, is almost certain to renew debate about the DLP’s management of the economy and is also bound to raise more questions about the country’s long term viability under a burdensome public debt.
Ten downgrades by Standard & Poor’s since 2009 have seen Barbados’ credit rating plummet from investment grade, BBB+, to the current B- which is deeper into junk territory. Since 2009, Moody’s, the other ratings agency, has downgraded Barbados seven times, the last in April when the sovereign rating moved to Caa1 from B3.
In June 2014, after a previous Moody’s downgrade, Prime Minister Stuart dismissively suggested it was of no real consequence as Government did not intend to embark on “an orgy of foreign borrowing”, as he put it. Hence, he contended, “what they say has as much value as what you would see in any garbage dump collected by the Sanitation Services Authority”.
In Mr Stuart’s estimation, a downgrade may not be a big deal but the fact of the matter is that the assessments of rating agencies do carry significant weight in global financial circles, even though the agencies carry some reputational blemishes. As a small country which lacks the resources needed for development purposes, going to the capital markets to raise financing is sometimes inevitable.
And this is where the credit agencies can make or break Barbados. This being the case, if Barbados wishes to source external financing, it has to satisfy the requirements set by lenders to reduce their risk. What has capital markets uneasy about Barbados is the perilous state of Government’s finances, the persistent printing of money by the Central Bank to finance a still large deficit and a public debt in relation to Gross Domestic Product that has gone beyond the comfort zone.
The ratings agencies have consistently pointed out these issues and underscored the need for them to be decisively addressed. What the ratings agencies are saying, with each downgrade, is that there was unsatisfactory progress, in their estimation, towards resolution of these vexing issues. Government clearly needs to do more; otherwise, the situation is more likely to get worse before it gets better. The ball, therefore, is firmly in Government’s court.
As we saw in the case of Sagicor, the impact of a ratings downgrade is not limited sometimes to just a country’s government but can also have an adverse effect on private entities based in the country. Readers will recall Sagicor’s decision to relocate its headquarters to Bermuda from Barbados, its home base for more than 100 years, after it too had suffered a downgrade by Standard & Poor’s, two weeks after the island’s sovereign rating had been lowered from B to BB- back in 2014.
In a statement at the time, the company explained: “S&P indicated that on a stand-alone basis Sagicor has a potential rating of “BB+”, which is supported by the company’s moderately strong capitalization, improving operating performance and adequate competitive position. However, the current rating action is as a result of the rating action on Barbados.”
The DLP’s goal of an “economically viable” Barbados is likely to prove elusive unless the particular issues are unresolved. Instead of griping, Government must recognize the gravity of the situation and rise to the challenge with more resolve and determination. There is too much at stake!
Additionally, at this time of vulnerability, Barbados needs, above all, to win the compassionate understanding and cooperation of institutions which can make a difference in helping to turn around its fortunes. Such surely will not come from the use of language which is more likely to generate more antagonism than understanding and cooperation.