S&P downgrades the economy again, predicts further gloom
Despite assurances by Prime Minister Freundel Stuart and Minister of Finance Chris Sinckler that there will be no devaluation of the Barbados currency under their watch, the international credit ratings agency Standard & Poor’s (S&P) is warning Barbadians that the dollar is still in danger.
S&P today warned that unless the Stuart administration did a better job at controlling its debt and restoring foreign reserves, the dollar was at risk of devaluation.
It was the same dire warning that the now fired Governor of the Central Bank of Barbados Dr DeLisle Worrell first gave in January and repeated last month, a week after both Sinckler and Stuart had insisted the dollar was safe as long as they were in office.
And speaking at a news conference on Monday, the Minister of Finance again assured Barbadians that there would be no devaluation as the country was not facing a “doomsday” scenario.
However, S&P today painted a much gloomier picture of both the fate of the dollar and the Barbados economy on a whole, as it announced yet another downgrade, this time to ‘CCC+/C’, based on Government’s limited financing alternatives and low international reserves. And if the conditions do not improve, there will be a further downgrade within the next year, S&P warned in issuing a negative outlook for the island.
“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 reflected its view that Government was either unable or unwilling to take timely steps to redress the situation.
The ratings agency telegraphed that it had little confidence in the Stuart administration’s ability to drag things back from the edge, as it completely ignored the assurances from both Stuart and Sinckler that devaluation of the Barbados dollar was not an option.
It was not immediately clear whether its report was completed before the announcement that a revamped economic advisory team to be led by former Prime Minister Owen Arthur was being formed, or if it felt the team would make little difference.
“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 . . . . 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.” S&P said in presenting its rationale for the downgrade.
It concluded that Government’s limited access to private sector funding locally, as well as a fall in external funding and dwindling foreign exchange reserves, weakened the country’s ability to meet its debt-servicing requirements.
The international agency was harsh on the administration over the pace at which it moves to correct the problem, suggesting strongly that it had little confidence that the Democratic Labour Party (DLP) Government would follow through on any meaningful measures announced in the Estimates of Revenue and Expenditure to be presented next week by Sinckler, particularly with an election about a year away.
“The government plans to present the 2017-2018 budget [Estimates] 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,” it said.
The American financial services company said Government was behind schedule with the streamlining of state enterprise financing, the management of which continues to be a drag on the public purse, it said.
In addition, the agency pointed to the proposed sale of the Barbados National Terminal Company Limited, which is still pending a year after Sinckler said it was a done deal.
“This demonstrates policy inaction and prospects for slow progress on asset sales,” S&P stated.
“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 both the Wyndham Hotel at Sam Lord’s Castle and the Hyatt project on Lower Bay Street suffering delays, “and our expectations for ongoing risks associated with sluggish fiscal correction” S&P lowered its growth forecast for Barbados, as well as the gross domestic product in relation to the population, “which weakens Barbados’ overall economic profile”.
“The negative outlook reflects the potential for a downgrade over the next twelve 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 [current account deficits].
“This scenario would likely lead to further deterioration in the availability of deficit financing and pose challenges for the fixed exchange rate,” it said in its outlook for the economy.
S&P said it could revise the outlook to stable within the next year if the administration is able to stem 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”.
Today’s downgrade is the second since the start of the year – the Caribbean Information and Credit Rating Services Limited in January lowered by one notch its ratings on the debt issue, and well as its foreign and local currency rating, with a negative outlook – and it comes as a further blow to Government, which has been accused of serious economic mismanagement by the Opposition in the wake of 18 previous downgrades – mostly by S&P and Moody’s – since the ruling DLP came to power in 2008.
It also comes against the backdrop of concerns that the country may need to re-enter into a formal programme with the International Monetary Fund, although Sinckler has ruled it out, even though Arthur has been pushing for such a programme.