|The Barbados downgrade |
Thursday, March 16 2017
S&P Global Ratings, on March 3 lowered its long-term foreign and local currency sovereign ratings on Barbados to ‘CCC+’ from ‘B-’. The outlook is negative. They also lowered the short-term ratings to ‘C’ from ‘B.’ At the same time, they lowered their transfer and convertibility assessment for Barbados to ‘CCC+’ from ‘B-’.
Barbados has suffered 17 previous downgrades – mostly by the international credit ratings agencies Moody’s and Standard & Poor’s. The latter downgraded Barbados ten times since 2009, moving the country’s credit rating form BBB+ to B-, which is in junk territory, while the former downgraded Barbados seven times since 2009, from B3 to Caa1.
The latest downgrade appears to reflect a lack of proactive decision-taking, a high level of central bank financing and policy inaction. In providing details of the rationale for their decision, S&P notes that, “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 materialise 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.”
It has to be noted that, “from April to December 2016 (the first nine months of fiscal 2016-2017) the Central Bank of Barbados, 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”.
It can be argued that the downgrade of Barbados’ ratings and the negative outlook assigned are driven by concerns over the continued high fiscal deficit and increasing debt burden, which is being financed by the printing of money, creating a challenge for maintaining the fixed exchange rate, and by the delay in several tourism-related foreign direct investments (FDI) projects. One wonders if the warning by the previous Governor of the Central Bank of Barbados was not what was needed. The decision to get rid of him raises real concerns about the motivation of the Government of Barbados. Was their action a reflection of an attempt to silence voices concerned with the decisions taken by the Government?
The Barbados Prime Minister has been dismissive of the views of the rating agency. Such an approach is very unwise. Even if there is no intention about going to international market to raise capital, there are loans taken out with regional institutions and bonds issued on the local market. Certainly, local investors and regional creditors would take notice and minimise their exposure to a country that has been downgraded 17 times.
We need to ask about our financial institutions’ exposure to Barbados. When was the last time stress tests were conducted to test the exposure to Barbados? Our Government needs to pay attention from several perspectives to what is happening to Barbados and not make similar mistakes, adopt unproductive attitudes, or fail to protect our financial system. We do not want another bailout as was the case with CL Financial and Hindu Credit Union.