Moody’s downgrade no surprise – Stephen
President of the Barbados Economic Society Jeremy Stephen said Thursday’s downgrade of the Barbadian economy by Moody’s was inevitable since the Freundel Stuart administration lacked the will to implement the necessary corrective measures.
Six days after Standard & Poor’s (S&P) downgraded the Barbados economy, Moody’s Thursday downgraded the island’s Government bond and issuer ratings to Caa3.
The New York-based international ratings agency highlighted Government’s rising debt and its very limited prospects of fiscal reform. It also said that as a consequence, rising domestic and external financing pressures were very likely to impair the administration’s ability to service its debt.
“Moody’s has downgraded Barbados to Caa3 which is one of the lowest levels of C. It is literally two notches above where Moody’s believes that a country is guaranteed to default on internal and external loans,” Stephen said.
“My thinking has always been with respect to these downgrades that they are inevitable once Government does not have the political will to execute the recommendations made by the local and international financial communities.”
Stephen, one of Barbados’ leading economists, pointed out that Government was supposed to cut recurrent expenditure for sometime, but it had failed to act.
“It has not shown the will to do so in a meaningful way since general elections are due within a year. One can expect that Government will not cut expenditure for the remainder of this fiscal year and the earlier part of the next fiscal year. On top of that financing is drying up for Government on the local financial market and Government has resorted to printing money just to be able to pay wages and to pay for a great deal of its goods and services,” the President of the Barbados Economic Society explained.
In his presentation of the 2017-2018 Estimates of Revenue and Expenditure this week, Minister of Finance Chris Sinckler said Government was to spend $4.5 billion for the coming fiscal year, with a whopping $1.8 million due to go towards debt servicing.
Sinckler also projected a deficit of 4.4 per cent of gross domestic product, down from the current eight per cent of GDP.
Thursday, Stephen said even though the economy had recovered somewhat, the downgrade would be even more of a drag on the island’s credit worthiness.
“Moody’s is basically saying that Barbados could default on external or even domestic loans. It is also saying to investors that if they are involved in foreign direct investments they should consider the new risk environment.
“Moody’s is saying that the environment is highly speculative. The rating agency is also saying there is a high likelihood that investors could lose money or the likelihood of a default on their investments is growing,” he said.
Speaking at a Democratic Labour Party conference on Saturday, one day after the S&P downgrade, Prime Minister Freundel Stuart all but dismissed the ratings agency, saying Barbados could not be downgraded, and since the island was not looking to borrow, it could not be affected in the area of loans.
“Rating agencies can only downgrade Barbados’ credit worthiness, its ability to borrow. They cannot downgrade Barbados itself,” Stuart told party supporters.
However, Stephen dismissed the Prime Minister’s argument, pointing out that “the commercial banks may very well pull back on the amount of Government paper they invest in because of the rapid succession of downgrades.
“It could result in the lowering of interest rates, pushing as near as possible to negative interest rates on saving accounts. It could well feed into the credit union rates,” he stressed.
Already, interest rates on savings have fallen to as low as 0.01 per cent, although none of the banks have blamed downgrades for the decision to slash these rates.
Stephen also warned if policymakers were not careful the system could unravel with many of the leading companies shifting their headquarters to other countries.