Apr 2016 Financial News

Moody's downgraded Barbados' government bond rating and issuer rating to Caa1; changed outlook to stable

Apr 01, 2016

Global Credit Research - 01 Apr 2016

New York, April 01, 2016 -- Moody's Investors Service ("Moody's") downgraded Barbados' government bond rating and issuer rating to Caa1 and changed the outlook to stable.

Moody's decision to downgrade Barbados' issuer and bond ratings to Caa1 and revise the outlook to stable from negative was driven by the following factors:

1. Slow progress towards achieving fiscal consolidation consistent with a sustainable debt trajectory

2. Low level of foreign exchange reserves and weak funding conditions

Despite some progress to reduce the government fiscal deficit and contain pressures on foreign exchange reserves, macroeconomic and credit risks remain elevated in Barbados. Debt burden remains very high and additional fiscal consolidation is needed to reverse the rising trend in debt burden. Slow progress to narrow the fiscal deficit to sustainable levels continue to put pressure on foreign exchange reserves, placing the exchange rate peg at risk.

Affirmations:

..Issuer: Barbados

....Country Ceiling Bank Deposit Rating, Affirmed at NP

....Country Ceiling Rating, Affirmed at NP

Downgrades:

..Issuer: Barbados

....Country Ceiling Bank Deposit Rating, Downgraded to Caa2 from Caa1

....Country Ceiling Rating, Downgraded to B3 from Ba3

..Issuer: Barbados, Government of

....Issuer Rating, Downgraded to Caa1 from B3

....Senior Unsecured Medium-Term Note Program, Downgraded to (P)Caa1 from (P)B3

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa1 from B3

Outlook Action:

..Issuer: Barbados, Government of

....Outlook, Changed to Stable from Negative

RATINGS RATIONALE

First Driver: Slow progress towards achieving fiscal consolidation consistent with a sustainable debt trajectory

Although economic conditions in Barbados appear to be stabilizing with the improved growth outlook and low oil prices, the recent and anticipated fiscal consolidation is unlikely to be sufficient to put the debt trajectory on a downward path. We project debt-to-GDP ratio to continue to rise over the next 2-3 years and will likely reach 110% of GDP by 2018 (excluding debt held by the National Insurance Scheme). Continued accumulation of government debt will slowdown relative to the past three years due to the expected pick-up in economic growth and the reduction in fiscal deficit; however these improvements will not be sufficient to put debt-to-GDP ratio on a sustainable path. After a five-year period of anemic GDP growth of 0.3% on average, we expect growth to reach 1.5% in 2016, driven by a recovery in the tourism and construction sectors. We expect the fiscal gap to narrow to around 5.5% of GDP in the year ending in March 2016, from a peak of 11.2% in 2013. Despite these positive developments, significant fiscal challenges remain over the rating horizon. Particularly, high debt overhang and large funding requirements are important rating constraints, in addition to the high interest burden, which consumes around 27% of government revenues.

Continued fiscal consolidation to achieve a primary surplus of around 2% of GDP and a sustained recovery in economic growth would be necessary to stabilize the debt at the current level. Reducing the large debt overhang will require additional fiscal savings.

Second Driver: Low level of foreign exchange reserves and weak funding conditions

Foreign exchange reserves remain under pressure, after dropping by 19% since 2013. The slow pace of fiscal consolidation continues to pressure Barbados' reserve buffer, putting the exchange rate peg at risk. The government has increased its reliance on financing from the Central Bank of Barbados, while commercial banks reduced their exposure to the sovereign. The rapid increase in short-term debt since 2013 raises concerns about rollover risk, while short-term funding pressures remain in the face of the government's large financing gap.

Barbados' credit rating reflects moderately strong institutions, high governance indicators relative to peers, and a stable political system that has historically supported a high degree of policy consensus. The government debt structure has relatively limited exposure to exchange rate risk with less than 30% of government debt denominated in foreign currency; however the debt profile is vulnerable to rollover risk on short-term debt. Financing through the domestic debt market mitigates some of the refinancing risks. The sovereign rating is constrained due to relatively weak growth compared to peers, and significant fiscal challenges.

STABLE OUTLOOK

The outlook is stable, reflecting the risk of further deterioration in debt dynamics on the one hand, balanced by the prospect that the authorities will continue to reduce the fiscal deficit in the context of an improved external environment and more supportive economic growth.

WHAT COULD MOVE THE RATINGS UP

Upward pressure on the rating could build if the government accelerates its fiscal consolidation efforts, and puts the government debt-to-GDP ratio on a sustainable downward trajectory, and the economy maintains higher growth rates. 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.

WHAT COULD MOVE THE RATINGS DOWN

The rating may come under additional downward pressure if the government's ability to service its debt worsens, or it faces challenges in rolling over maturing short-term debt. Renewed pressure on foreign exchange reserves and sustainability of the peg may also trigger a downgrade.

COUNTRY CEILINGS

The long-term foreign currency bond ceiling is changed to B3, while the short-term foreign currency bond ceiling is unchanged at NP. The long-term foreign currency deposit ceiling is changed to Caa2, while the short-term foreign currency deposit ceiling remains at NP. The long-term local currency bond and deposit ceilings are changed to B1, while the short-term local currency bond and deposit ceilings remain unchanged at NP.

GDP per capita (PPP basis, US$): 16,365 (2014 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 0.5% (2015 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.6% (2015 Actual)

Gen. Gov. Financial Balance/GDP: -5.5% (2015 Estimate) (also known as Fiscal Balance)

Current Account Balance/GDP: -5.2% (2015 Estimate) (also known as External Balance)

External debt/GDP: 34.8% (2015 Estimate)

Level of economic development: Moderate level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

 

Source:
Moody's
Friday April 1, 2016

https://www.moodys.com/research/Moodys-downgraded-Barbados-government-bond-rating-and-issuer-rating-to--PR_345755