Downgrade will be ‘expensive’

It’s going to be more costly for the Freundel Stuart administration to get financing as a result of Moody’s Investor Services’ three-notch downgrade of Government’s bond rating, the Barbados Economics Society (BES) has cautioned.

BES vice-president Hallam Hope said today the fall from Ba3 to a highly speculative rating status of B3 would send up Government’s interest costs on borrowings and
raise expenditure.

“For future debt contracts, the lower rating will result in investors demanding higher risk premiums (in the form of higher coupons or interest rates), also leading to higher interest costs to Government,” he said in a statement.

Hope noted that although BES expected downgrades during the 2014-2015 fiscal year, it never anticipated it would be so sharp.

“A drop of three notches to B3 from Ba3 represents a significant shift in confidence in sovereign debt, as monitored and analysed by Moody’s,” said the BES’ second in command.

He noted that Moody’s evaluation of Barbados’ sovereign debt situation was extensive and highlighted the concerns Barbadians had been aware of for some time.

“The society, however, views the order of magnitude of this decline in our credit rating to be rather unusual, despite the issues raised by the rating firm,” he said.

Moody’s has forecast a continued negative outlook for this country, pointing to the “high and widening fiscal deficit, public sector expenditure rigidities, worsening Government debt metrics, weak foreign inflows and Central Bank deficit financing, which could endanger the currency peg as the major drivers of the rating action”.

Hope also pointed out that Barbados’ sovereign debt rating now stood below that of nations like Nigeria, Congo, Suriname, Bolivia, El Salvador and Bangladesh.

However, he said: “Barbados’ overall institutional strengths, political and economic stability, and history of never defaulting on its debt, should act as mitigating factors towards any sovereign investment risks.

“Notwithstanding this and the unexpected extent of the downgrade, the underlying drivers identified by Moody’s as the areas for improvement are in line with the views of the society –– in particular, the need for Government to reduce its fiscal deficit to levels that would allow it to significantly reduce its dependence on Central Bank financing,” the BEC official observed.

Hope said the expenditure reduction and revenue raising measures announced by the Government in 2013/2014, once fully implemented in fiscal year 2014/2015, shoud begin to move the deficit in the right direction.

“Downside risks remain, however, as expenditure has proven to be rigid and revenues have fallen by an average of three per cent since 2010,” he said.

4 Responses to Downgrade will be ‘expensive’

  1. David E Hall
    David E Hall June 5, 2014 at 8:16 am

    Expensive for everyone except maybe Government Ministers and their cohorts who have the privileges of drinking at the fountain head, at the expense of the masses, regardless of the state of affairs.

  2. Dominique Kahn
    Dominique Kahn June 5, 2014 at 3:40 pm

    Yes definitely, Barbados sovereign bond yields will move upwards, costing the govt more to borrow when they sell bonds. A downgrade is not good for bond yields.

  3. Veroniva Boyce
    Veroniva Boyce June 6, 2014 at 3:04 am

    Sleeping Giant at his best.


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