Barbados' move to join development bank could create financial pressure

Barbados could be facing a “bitter-sweet” economic outcome in agreeing to become a shareholder in the Development Bank of Latin America (CAF).

News of the agreement to join the multilateral financial institution, which is subject to ratification by Parliament, was announced by international ratings agency Moody’s in its September 15 credit outlook for Barbados.

But the agency said not only could the two annual payments to join the CAF, totalling US$50 million, put pressure on the fiscal accounts of the Freundel Stuart administration, but joining the bank will not resolve the country’s credit problems.

“Prospective CAF membership and loans alone are not enough to address Barbados’ ongoing credit challenges. Real GDP continues to stagnate and the authorities are striving to reduce a fiscal deficit that totaled 12.4 per cent of GDP in the fiscal year that ended 30 March 2014, and debt [to] GDP that will rise above 100 per cent in fiscal 2015,” it said.

The ratings agency also cautioned that the extent to which public sector projects in Barbados would meet CAF conditions for disbursement, remained questionable.

It also put Government on notice that it will unlikely to be able to use funds from the development bank to cover its most pressing budgetary needs.

The reason given by Moody’s is that CAF typically lends for infrastructure development, while an estimated two-thirds of Government expenditure is consumed by wages, transfers                  and subsidies.

“Furthermore, CAF funding could be tied to projects requiring partial financial guarantees, which might require additional spending by Barbados. In the context of Barbados’ considerable fiscal consolidation effort currently under way, the equity stake the Government is purchasing in CAF could also negatively pressure fiscal accounts,” added Moody’s.

On the bright side, Moody’s said membership of the bank would be a credit positive for Barbados by broadening the Government’s otherwise limited financing pool.

“Barbadian authorities continue to struggle with significant fiscal pressures and a stagnant economy, which have increased gross borrowing requirements and led to a heavy reliance on short-term debt that elevates refinancing risk. We estimate that the Government’s gross financing needs will total more than 30 per cent of GDP this year and next. We expect CAF loans to lower Barbados’ cost of funding and the loans’ longer tenors to reduce refinancing risk,” it said.

“The loans will be subject to CAF board approval and could be disbursed as soon as the country ratifies the agreement. We expect the ratification to take place within the next few months, allowing Barbados to start borrowing from CAF in the fourth quarter of this year, or first quarter of next year.”

The outlook also noted that funding costs from the bank compare favourably with those that Barbados obtained on a recent US$225 million five-year amortizing syndicated loan.

Moody’s said significantly lower borrowing costs should help local authorities stem the rise in debt service costs, which are currently among the highest of all sovereigns rated by the ratings agency.

“In addition, the availability of up to US$200 million of fresh financing could mitigate the Government’s high rollover risk, which has been exacerbated by its increased reliance on domestic short-term borrowing,” it said.

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