Way off course
Moody’s rejects Govt’s fiscal strategy
In a clear rejection of Government’s fiscal medicine, the international ratings agency Moody’s today not only joined with its New York-based counterpart Standard & Poor’s (S&P) in delivering another economic black-eye to Barbados, but it also signalled loudly to international creditors the strong likelihood of the island defaulting on its debts over the next two to three years.
The Moody’s downgrade — the 19th suffered since the ruling Democratic Labour Party administration took office nine years ago — reduces Government’s bond and issuer ratings to Caa3, after S&P last Friday downgraded Barbados to ‘CCC+/C’ on account of its limited financing alternatives and low international reserves.
The staggering news also comes on the heels of a commitment by Minister of Finance Chris Sinckler — by way of the Estimates of Expenditure and Revenue for fiscal year 2017/2018, which begins on April 1 — to repay $1.8 billion in outstanding loans this coming year.
However, Moody’s today called into serious question Government’s ability to meet its loan obligations, while highlighting its ballooning debt, which stood at 111 per cent of its gross domestic product (GDP) at the end of last year.
The Freundel Stuart administration also has on the books, accumulated arrears to the private sector and the National Insurance Scheme to the tune of 11 per cent of GDP. And given its large refinancing requirements and the high interest burden, which consume about 27 per cent of its total revenues, Moody’s said it could only spell severe credit risks.
In fact, it went as far as to warn international creditors that even though it was currently maintaining a stable outlook on its Caa3 rating, there was “a high probability” of a credit default by the island within the next two to three years.
“With commercial banks having reduced their exposure to the sovereign, the Government has become increasingly reliant on short-term debt issuance, financed by the Central Bank of Barbados, to meet the rising refinancing and interest costs.
“The rapid increase in short-term debt since 2013, allied with the large financing gap, imply mounting concerns about rollover risk,” Moody’s said.
To make matters worse, the ratings agency pointed out that the Central Bank, which up until the end of last year was the only source of new financing for Government, with holdings in the amount of 13.2 per cent of GDP, now appeared unwilling to increase its exposure, triggering even more worry as far as a credit default was concerned.
However, Moody’s sought to assure international investors that even with pressure building on the Barbados dollar, there was limited exposure for them in term of exchange rate risk since less than 30 per cent of Government debt was denominated in foreign currency.
But the worrying news for Barbados residents who thought they had seen the worse form of austerity, having suffered through Government’s home-grown Fiscal Consolidation and Growth Strategy over the last three to four years, is that Moody’s is less than impressed that it has amounted to anything.
In fact, as if to suggest that the programme, which included a public sector wage freeze, heightened taxation and over 3,000 public sector retrenchments, was a complete failure, Moody’s today called on Government to initiate “a credible fiscal consolidation programme to arrest the rise in debt-to-GDP ratio and put debt on a sustainable downward trajectory.
“These developments would likely be accompanied by reduced reliance on short-term debt and financing from the Central Bank, and a rebound in international reserves,” the ratings agency said.
Moody’s also warned of the likelihood of a further downgrade if losses to creditors exceeded 35 per cent in NPV terms, the highest level consistent with the Caa3 rating.
No word has been forthcoming from Sinckler since the Moody’s news broke this morning.
However, based on the Estimates he presented this week, Government has every intention of proceeding on its current economic course in the hope of getting the deficit down to 4.4 per cent of GDP from the current eight per cent.
In fact, Stuart suggested as much yesterday, when, without making mention of any ratings agency, he sternly warned that Barbados had long passed the days when it needed external validation from “metropolitan capitals”.
And while likening the grading of an economy to the marking of an examination, the Prime Minister also made it clear that he was not about to let anyone from outside — let alone any external marker — “shame” Barbados into thinking it had failed.
To do that, he said, would belie the country’s proud boast of 50 years of Independence and take it back to a day when approval was needed from outside.
“We seem now to be working ourselves back into a frame of mind where once again we want to sit exams for people outside of Barbados and wait on them to grade us and if they tell us we have passed we are supposed to feel good that we have passed, and when they tell us we have failed we are supposed to hold our heads in shame and think that we are failures,” Stuart told the gathering for a presentation of $10 million in equipment by the Chinese Government at the Ministry of Education yesterday morning.
It was his second such economic rebuff after S&P downgraded Barbados to ‘CCC+/C’ and issued a negative outlook for the island, while warning that the sustainability of the Barbados dollar was now under threat, amid Government’s continued reliance on the Central Bank to finance its deficit.