May 2010 Financial News

Rating riding on Economic Recovery

May 10, 2010

Recently, Standard & Poor’s (S&P’s) affirmed Barbados’ BBB/A-3 foreign currency and BBB+/A-2 local currency sovereign credit ratings, making no change since the previous rating downgrade last year.

However, the view has been expressed that signs of an economic recovery must be seen locally if the prospect of a future downgrade is to be avoided.

Lecturer in Economics at the University of the West Indies, Troy Lorde, told the Business Monday that, “the only sure thing that could seriously reduce Barbados’ likelihood of further downgrading would be an economic recovery, which would both generate higher revenues, reducing the need for spending cuts, and create jobs. This may be unattainable within the context of a heavy debt burden and unresolved fiscal deficit pressures.”

A credit rating is an objective, independent assessment of a country or institution’s ability to meet its financial commitments and is based on statistical calculations of a country’s likelihood of default. Effectively, it indicates how financially secure the respective country (or company) is and therefore the likelihood of an investor getting their money back. The rating determines the level of risk of the investment and if the investment rate being paid is worth the level of risk.

According to Lorde, “S&P said that transfer and convertibility was unchanged at BBB+. These unchanged ratings ensure that Barbados’ external debt remains investment grade. This suggests that there has been some degree of stabilisation in the local economy.”

He pointed, however, to the fact that the outlook remained negative, “meaning that there is some likelihood that there will be downward change(s) in the next six months to two years if the economic situation in the country does not improve”.

“What would an S&P downgrade mean for Barbados? Lowering the country’s external credit rating could make it more expensive to raise money on the international financial markets,” he said.
Lorde pointed out that because these markets respond quickly to changing economic information, it is important for the Government to carefully weigh the content of this rating and respond in ways that will offer reassurance to financial markets.

“While the economic situation in Greece is very dissimilar to Barbados’, we should at least take note of how the markets reacted to S&P ‘S lowering of their credit rating. A cursory interpretation of the S&P analysis would suggest that Barbados’ best hope is for an improvement of the external environment. A deeper reading suggests that there are policy options,” he said.

The lecturer in Economics explained that Government debt and high interest costs, identified by S&P as the main constraints of Barbados’ credit worthiness, mean that there are no easy choices. “Public policy, however, cannot afford passivity in the face of unfavourable external influences. A clear statement of policy by the authorities appears necessary for the bolstering of economic confidence.

“The Medium Term Fiscal Strategy put forward suggests that Government plans to resolve the fiscal problems first to facilitate sustainable growth later. In this context, it will be important to mange and moderate near term socio-economic expectations,” he said.


Source:
Nicola Clarke
Barbados Advocate
Monday May 10, 2010

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