Another S&P downgrade
The international ratings agency Standard & Poor’s (S&P) today downgraded Barbados to ‘CCC+/C’ based on its limited financing alternatives and low international reserves.
S&P also issued a negative outlook for the island, while warning that the sustainability of the Barbados dollar is now under threat, amid Government’s continued reliance on the Central Bank to finance its deficit.
“As a result, we are lowering our long-term foreign and local currency sovereign credit ratings on Barbados to ‘CCC+’ from ‘B-’.
“We are also lowering our short-term foreign and local currency sovereign credit ratings to ‘C’ from ‘B’,” the ratings agency said.
It also explained that its negative outlook reflects its view that Government was either unable or unwilling to take timely steps to redress the situation.
The latest downgrade comes against the backdrop of assurances issued by the country’s Minister of Finance Chris Sinckler this week that the country was not facing any “doomsday” scenario and that the Freundel Stuart administration still had the economic situation well in hand.
Following is the full text of the S&P statement:
• Increased reliance on Central Bank financing of the still-high government
deficit and the fall in international reserves reflect heightened
challenges for policy implementation, the sustainability of the peg to
the U.S. dollar, and underpin expected weaker growth prospects in
• As a result, we are lowering our long-term foreign and local currency
sovereign credit ratings on Barbados to ‘CCC+’ from ‘B-’.
• We are also lowering our short-term foreign and local currency sovereign
credit ratings to ‘C’ from ‘B’.
• The negative outlook reflects our view that the government’s ability or
willingness to take timely steps to redress deficit and financing
pressures and bolster international reserves will likely deteriorate
On March 3, 2017, S&P Global Ratings lowered its long-term foreign and local
currency sovereign ratings on Barbados to ‘CCC+’ from ‘B-’. The outlook is
negative. We also lowered the short-term ratings to ‘C’ from ‘B.’ At the same
time, we lowered our transfer and convertibility assessment for Barbados to
‘CCC+’ from ‘B-’.
The downgrade reflects our view that the government of Barbados’ willingness
to take timely, proactive corrective measures to strengthen its financial
profile continues to erode. In our view, a weaker ability to meet its
debt-servicing requirements stems from still-high fiscal deficits, limited
access to private-sector funding in the local market, as well as a decline in
external funding, and with it foreign exchange reserves. The sovereign’s debt
servicing capacity depends on favorable financial and economic conditions
consistent with our “Criteria For Assigning ‘CCC+’, ‘CCC’, ‘CCC-’, And ‘CC’
Ratings,” in our opinion.
The government has not succeeded in substantially reducing high fiscal
deficits. Furthermore, reliance on the central bank to directly finance these
deficits continued to rise again in 2016. From April to December 2016 (the
first nine months of fiscal 2016-2017) the central bank, and, to a lesser
degree, the National Insurance Scheme (NIS) in effect wholly financed the
government’s borrowing needs. Private domestic financial institutions reduced
their exposure to government securities, and the government paid down external
debt. We consider the policy of ongoing dependence on central bank financing
at odds with the government’s goal of defending Barbados’ long-standing
currency peg with the U.S. dollar. It significantly curtails the central
bank’s ability to act as a lender of last resort in the financial system.
The high level of central bank financing underscores the challenges associated
with timely corrective fiscal policy actions. The government plans to present
the 2017-2018 budget in the coming month. While it seemingly aims to rely on
increased recourse to asset sales to fund the deficit, in our view, the
prospects for deeper expenditure or revenue adjustment are uncertain,
underscored by the poor track record of execution. This comes as the country
moves into an electoral cycle, with parliamentary elections due by February
2018. Furthermore, one-off revenues from the sale of the Barbados National
Terminal Company are still pending after initially expected to materialize a
year ago. This demonstrates policy inaction and prospects for slow progress on
asset sales. The streamlining of state-owned enterprise finances is behind
schedule, and their management continues to weigh on Barbados’ fiscal profile.
Finally, delays in complying with terms and requirements for official
borrowing (from multilateral agencies, for example) have contributed to delays
in external disbursements, which are important to bolster international
reserves. In sum, the various failures to respond in a timely fashion to
mitigate fiscal and financial pressures further weigh on our view of Barbados’
institutional and policy effectiveness.
With about US$15,800 per capita GDP projected for 2017, 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 depends
highly on tourism. While three major hotels had announced new investments on
the island–the Hyatt, the Sam Lord’s Castle project by Wyndham, and the
expansion of the all-inclusive Sandals hotel–only Sandals is not suffering
from delays. Given these recurrent delays, and our expectations for ongoing
risks associated with sluggish fiscal correction, we have lowered our growth
forecast and level for per capita GDP, which weakens Barbados’ overall
We expect Barbados’ net general government debt to continue to rise toward
111% of GDP over the next three years from 101% in 2016. We consider this
level of debt a key credit weakness, 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%. We
assess Barbados’ contingent liabilities as limited, considering our view of
the strength of the banking system, with assets of the deposit-taking
financial institutions at 170% of GDP.
The high current account deficit (CAD), which is not fully financed by foreign
direct investment, and slow external disbursements from multilateral and
official creditors contributed to a decline in international reserves to
US$341 million at year-end 2016. This keeps the country’s external
vulnerabilities high and underscores challenges of sustaining the fixed
exchange rate. 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 about 40% of CAR during
2017-2019. Our external assessment also considers that net external
liabilities of a projected 160% of CAR during 2017-2018 are substantially
higher than narrow net external debt. Finally, in our view, data on Barbados’
international investment position has inconsistencies and is not timely.
ow inflation is a reflection of global conditions rather than effective
monetary policy execution given the fixed exchange rate regime. In addition,
the central bank’s ongoing financing of the government’s deficit impairs the
credibility of monetary policy, the peg, and the ability of the central bank
to act as a lender of last resort for the financial system.
The negative outlook reflects the potential for a downgrade over the next 12
months should the government fail to make additional progress in lowering its
high fiscal deficit or if external pressures worsen with persistent and large
CADs. This scenario would likely lead to further deterioration in the
availability of deficit financing and pose challenges for the fixed exchange
We could revise the outlook to stable within the next 12 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
and bolsters international reserves.