Mar 2017 Financial News

'Very high' likelihood of Barbados defaulting on debt ...says Moody's as it downgrades island's credit rating

Mar 13, 2017

Just six days after Barbados was downgraded by Standard & Poors, the other global credit rating agency on Thursday downgraded the island’s bond and issuer ratings to Caa3, while noting that it assessed “the likelihood of a credit event in the near-term as very high, given lack of fiscal adjustment and increasingly limited financing options.”

A credit event is generally defined as “a default, bankruptcy, or other situation which is recognized as affecting the creditworthiness of a country or organization and which may trigger insurance payments as defined in a credit default swap.”

According to Moody’s, Caa3 is one notch above Ca, which is considered to be “extremely speculative” and “default imminent.”

In its overall analysis of Barbados, Moody’s said: “Despite the government’s efforts to contain the fiscal deficit and alleviate pressures on foreign exchange reserves, the fiscal deficit remains large and credit risks have increased in Barbados.

“The debt burden has risen in recent years and will continue to do so for the next few. Domestic and external liquidity pressures on the sovereign have increased. We assess the likelihood of a credit event in the near-term as very high, given lack of fiscal adjustment and increasingly limited financing options.”

In the statement announcing the downgrade, Moody’s said its decision to downgrade Barbados’ issuer and bond ratings to Caa3 was driven by:

• The continued increase in government debt and very limited prospects of fiscal reform
• In consequence, rising domestic and external financing pressures that are very likely to impair the government’s ability to service its debt

On the issue of the continued increase in Barbados government debt and very limited prospects of fiscal reform, Moody’s said: “Although macroeconomic conditions in Barbados have stabilized with a pick-up in growth, driven by a rebound in tourism and investment in the sector, the fiscal deficit remains high.

“The economy grew by 1.6 per cent in 2016 after reporting anemic growth of less than 1.0per cent since 2010. The drop in oil prices and an increase in tourist arrivals temporarily alleviated some of the mounting pressures on foreign exchange reserves.

“However, reform efforts to address persistently large fiscal deficits since 2014 have not achieved a meaningful turnaround in fiscal performance, leading to what we consider to be an unsustainable increase in the government’s debt burden.

“The government debt burden reached 111 per cent of GDP at end- 2016, and the authorities have accumulated a large stock of arrears to the private sector and the National Insurance Scheme, estimated at a further 11 per cent of GDP at endFY2015/16. Large refinancing requirements and the high interest burden, which consumes around 27 per cent of government revenues, pose increasingly severe credit risks.

“Given the scale of the fiscal and structural reforms needed to correct the rising imbalance, the likelihood of a credit event is now very high.

As a result of the rise of the rise in the island’s debt and the limited prospects for fiscal reform, Moody’s noted that rising domestic and external financing pressures are very likely to impair the government’s ability to service short-term debt.

According to Moody’s: “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 shortterm debt since 2013, allied with the large financing gap, imply mounting concerns about rollover risk. In 2016, the central bank was the only source of new financing for the government. As of end-2016, the central bank’s holdings amounted to 34 per cent of outstanding short-term T-bills, equivalent to 13.2 per cent of GDP. The central bank’s unwillingness to increase its exposure to the government would trigger a credit event.

“External financing pressures are also high and rising. A number of factors, in particular maintaining the peg to the US dollar, caused the stock of international reserves to drop significantly last year coming to US$340.5 million in December from US$463.5 twelve months earlier. This is the lowest level of reserves recorded since 2009, and only half the average level observed between 2009 and 2012, equivalent to under 11 weeks of imports at end-2016, compared to 13.6 weeks and 14.7 weeks in 2014 and 2015, respectively. The persistent decline in reserves continues to pressure the exchange rate peg.

Source:
Trinidad Guardian, A15
Saturday March 11, 2017