Oct 2010 Financial News

Standard Poor’s downgrades Barbados to BBB-

Oct 25, 2010

Standard & Poor’s Ratings Services said yesterday that it was lowering its foreign-currency sovereign credit rating on Barbados to ‘BBB-/A-3’ from ‘BBB/A-3’ and its local-currency rating to ‘BBB-/A-3’ from ‘BBB+/A-2’. Standard & Poor’s also said that it lowered the transfer and convertibility assessment on Barbados to ‘BBB’. The outlook is stable. “The downgrade reflects the continuing weakening of the government’s fiscal profile,” explained Standard & Poor’s credit analyst Olga Kalinina. “There is an increasing risk that delays in the fiscal consolidation might lead to debt surpassing currently projected peak in 2012.” The downgrade of the local-currency rating also reflected the country’s rising fiscal imbalances. The local-currency rating downgrade has resulted in the alignment of the foreign- and local-currency ratings, which is typical for most sovereigns with a pegged exchange regime.

Despite the Barbadian government’s commitment to reduce fiscal deficits to reach a balanced budget by fiscal 2014, as stated in its March 2010 medium-term fiscal strategy (MTFS), the fiscal consolidation has proven to be more difficult and protracted. Central government deficits were an estimated 9.3 per cent of GDP in the first eight months of 2010, down from 10.4 per cent during the same period of last year. This weaker-than-expected performance, combined with a subdued economic outlook—an expected real GDP contraction of 0.5 per cent this year, followed by a forecasted 2per cent rebound in 2011—should result in only a gradual fiscal turnaround. General government deficits are projected at 4.7 per cent of GDP this year, 3.3 per cent in 2011, and 2.6 per cent in 2012.

The rating agency said: “Although some factors leading to the poor fiscal outcome this year are cyclical and should improve with the economic rebound expected in 2011, other weaknesses—such as large and difficult-to-contain transfers and subsidies (amounting to 39 per cent of total spending in 2010) and a growing interest burden (expected to rise to 13 per cent of general government revenues in 2010 from eight per cent in 2007)—are more difficult to address. These will likely keep the debt at high levels longer than the government expects. Considering that wage pressures will likely increase following the economic rebound, it is hard to contemplate a meaningful fiscal consolidation without new revenue measures.”

It said that the Barbadian authorities were “currently considering various mixes of revenue measures that they could introduce at the beginning of next fiscal year (April 1, 2011) to lower the deficits and bring down the debt levels.” However, it said, the timing and magnitude of this effort was vague. “At the same time, the economic growth will likely be modest over the next few years because of the uncertain economic outlook in the US and UK, which are major providers of tourist, financial, and investment flows to Barbados. Overall, Barbadian fiscal deficits will likely decrease only gradually, and we expect that the government’s debt will rise at least until 2012.”

“The stable outlook hinges on our expectation that the authorities will, in the next six months, put in place fiscal measures to reverse the rising debt trajectory going forward,” Ms Kalinina added. The ratings could come under downward pressure if Barbados’s fiscal deterioration persists and the economic base erodes more severely, which would result in further debt increases and the deterioration of already weak external balances, potentially leading to pressures on the currency peg.


Source:
Trinidad Guardian
Saturday October 23, 2010

http://guardian.co.tt/business/business/2010/10/23/standard-poor-s-downgrades-barbados-bbb