Mar 2017 Financial News

Barbados Gets Another Downgrade Blow and Warning That Dollar Under Threat

Mar 06, 2017

BRIDGETOWN, Barbados, Friday March 3, 2017 – International ratings agency Standard & Poor’s (S&P) today hit Barbados with yet another downgrade, while warning that the sustainability of the Barbados dollar is under threat as government continues to rely on the Central Bank to finance its deficit.

The development came just a few days after Minister of Finance Chris Sinckler admitted that a high fiscal deficit and debt accumulation were retarding economic growth but insisted that the Barbados dollar is in absolutely no danger of being devalued. It is currently pegged to the US dollar 1:2.

But in a statement issued in the evening, S&P did not rule out a possible devaluation. It said increased reliance on Central Bank financing of the still-high government deficit and the fall in international reserves reflect heightened challenges “for the sustainability of the peg to the US dollar” and underpin expected weaker growth prospects in Barbados.

As a result, the ratings agency said it was lowering the long-term foreign and local currency sovereign credit ratings on Barbados to CCC+ from B-. It also lowered the short-term foreign and local currency sovereign credit ratings to C from B.

“We consider the policy of ongoing dependence on Central Bank financing at odds with the government’s goal of defending Barbados’ long-standing currency peg with the US dollar. It significantly curtails the Central Bank’s ability to act as a lender of last resort in the financial system,” S&P said in its statement.

“The government has not succeeded in substantially reducing high fiscal deficits. Furthermore, reliance on the Central Bank to directly finance these deficits continued to rise again in 2016. From April to December 2016 (the first nine months of fiscal 2016-2017) the Central Bank, and, to a lesser degree, the National Insurance Scheme (NIS), in effect wholly financed the government’s borrowing needs,” it added.

S&P said it expects Barbados’ net general government debt to continue to rise toward 111% of GDP over the next three years, from 101% in 2016.

“We consider this level of debt a key credit weakness, particularly given Barbados’ narrow, open economy – which depends highly on tourism – and fixed exchange rate regime,” it noted.

The ratings agency said if government fails to make additional progress in lowering its high fiscal deficit, there will be a further downgrade within the next year.

“We could revise the outlook to stable within the next 12 months if the government succeeds in stemming further slippage in its fiscal accounts – be it from implementation of fiscal measures or a stronger-than-expected rebound in growth; improves its access to financing, especially from private creditors locally and globally; and stabilizes the country’s external vulnerabilities and bolsters international reserves,” S&P said.

The latest development follows 18 previous downgrades issued by not only by S&P but by Moody’s and other ratings agencies as well, since the Democratic Labour Party came to power in 2008.

In an immediate response to the S&P statement, the Ministry of Finance said it regretted the recent downgrade but said it was “expected”.

Acknowledging S&P’s concern about the dip in international reserves, Sinckler’s ministry sought to explain that the decline was largely due to “legal and administrative delays in public inflows linked to various projects”.

But it added that government expects that situation will begin to ease shortly, leading to a restoration of reserves to more comfortable levels. Additionally, the Finance Ministry says, government will reduce its reliance on the Central Bank to finance the deficit.

“In the coming week, Government will release its fiscal outturn figures for the financial year ending March 2017 and Estimates for the coming Financial Year 2017-2018. In both cases, it will be noticed that not only has Government met its fiscal target for the current fiscal year, but it has planned its Budget to realize a further reduction in the deficit for the coming fiscal year. This should ease Government’s financing requirements for the coming financial year and lead to a claw back in the level of Central Bank accommodation of the fiscal deficit going forward,” it said in a statement.

But S&P is not convinced. Suggesting that it had little confidence the government would follow through on any meaningful measures announced in the Estimates to be presented by Minister Sinckler next week, it said “the prospects for deeper expenditure or revenue adjustment are uncertain, underscored by the poor track record of execution”.

Source:
Caribbean360
Saturday March 4, 2017

http://www.caribbean360.com/news/barbados-gets-another-credit-ratings-blow-warning-peg-us-dollar-threat