On June 15, 2011, Standard and Poor’s (S&P) issued the full analysis of their May 3, 2011 Press Release, which reaffirmed Barbados’ (BBB-) rating and stable outlook on its foreign bond. Stating that Barbados is slowly recovering from the severe impact of the global financial crisis, S&P also cited the importance of the tripartite support for the Government's current adjustment programme and the large surpluses at the National Insurance Scheme, providing flexibility to financing the fiscal accounts - as key strengths to the rating. Even though S&P noted Government's commitment to reduce the fiscal deficits, it also cautioned that future weakness could arise in the form of fiscal deficits that are large and unsustainable in the medium term. As in the early May press release, (which tends to precede these analytical reports by a couple of weeks), S&P emphasised that as a small, open economy, Barbados remains highly dependent on the economic performance of the U.S. and the U.K and that the external accounts will need to remain stable. Given that both the S&P full analysis and Moody’s press release (indicating a reaffirmation of Barbados’ (Baa3) rating and negative outlook on its foreign bond) have been featured within the same week, the Central Bank has sought to clarify some of the main issues surrounding these announcements.
1. Why are the ratings from the international rating agencies important or necessary?
Prospective investors rely on the credit rating agencies to provide guidance on whether they should entrust their money to various governments. The sovereign rating attempts to quantify the creditworthiness of a government’s debt, mostly for international investors who are not familiar with the country and aims to provide a comparison to other sovereigns. Particularly for the foreign debt rating, given the economic risks identified in the report, should the Barbados Government decide to borrow abroad in the near future, it will probably need to compensate investors for accepting the risks identified in the rating reports, by paying a higher interest rate than would have been the case previously.
2. What does the domestic debt downgrade by Moody’s mean for Barbados?
It signals Moody’s concern that the domestic market does not have the capacity to absorb increasing amounts of Barbados bonds and that issuing more local debt could place pressure on Government’s ability to service this debt. The Barbados Government is renowned for its stellar debt service reputation, having never defaulted on its debt and is fully able and committed to servicing its obligations. Nevertheless, international investors are sure to be more vigilant in observing Barbados’ economic performance going forward.
3. How does the domestic debt downgrade relate to Barbados’ foreign debt rating?
Government’s foreign debt rating has not been downgraded. Barbados’ international reserves are sufficient to service its foreign debt. Further, the proportion of the country’s expected foreign exchange earnings needed to service the external debt remains below 10 percent for the next decade, which is well within internationally-accepted norms for debt service. As a result, the rating on Barbados’ foreign debt has not been changed for the year, since it is clear that Barbados has sufficient reserves to service its foreign debt.
4. What does a negative outlook indicate?
It means that in the next 12-18 months, the assigned rating could be lowered, if there fails to be an improvement in the areas identified, such as the fiscal deficit ratio, the debt ratio, the pace of economic recovery or the balance of payments. Conversely, a positive outlook means that the rating could be raised if the country's economic prospects consistently improve or if the fiscal accounts are further consolidated.
5.Why does Moody’s have a negative outlook and Standard and Poor’s a positive outlook?
That is difficult to say, since for the most part, even though their rating methodologies consider similar variables, there is a subjective component to the rating assessment. However, of note is the fact that both rating agencies were in Barbados during the first quarter of this year (within a month of each other) and would have reviewed similar data and input from a number of public and private sector entities. Standard and Poor’s (S&P) stable outlook indicates that going forward, the economic outturn is not likely to warrant a further change in their rating, since their rating change of last October. Moody’s, not having adjusted its rating in the last eighteen (18) months, is of the view that their rating could be lowered over the next couple of months, to better reflect the expected economic outcome. More importantly, by the standard international comparison, Barbados’ (BBB-) foreign debt rating by S&P is comparable to a (Baa3) foreign debt rating by Moody’s.
6. Are Barbados’ bonds still considered to be of investment grade, both by Moody’s and by Standard and Poor’s?
Yes, both Government’s local and foreign bonds are of investment grade. This means that institutional investors (who are guided by stipulations about the ratings on investments they may purchase) should continue to hold and purchase Barbados’ bonds. Internationally, there has been no increased trading of Barbados Government bonds in response to the rating agency announcements, since investors appear comfortable with the earnings and inherent risks of these foreign bonds. Furthermore, several other small emerging economies (such as Jamaica, Bahamas and Aruba) are at or below investment grade status and are still able to access the international capital market, albeit at higher costs.
7. How high is Government’s debt actually?
The debt which Government owes to nongovernmental institutions and individuals is 56 percent of GDP. While it is true that Government bonds and other debt obligations amount to over 100 percent of GDP, much of this debt is owed to the NIS and institutions owned by Government, and there are deposits which Government holds that combined offset some of the debt owed to private firms and individuals. Government borrowing in the private sector is therefore no more than 56 percent of GDP, which is not overly burdensome.
8. What policy changes are suggested by the Moody’s analysis?
Barbados’ commitment to the maintenance of the exchange parity is beyond question, and there are more than enough foreign exchange reserves to take care of the additional foreign exchange that may be needed to finance more expensive oil imports. However, it remains crucial to contain the fiscal deficit, in line with Government’s MTFS, in order to ameliorate pressure on the foreign exchange and ensure that there is no financing of Government by the Central Bank.
9. Does the downgrade signify something terribly wrong with our economic fundamentals at this time?
It underscores the need for sustained fiscal constraint, as a critical factor for an improved rating and reflects the risks that Government already recognises, to achieving such. Namely, that with the economic recovery now taking root, it is challenging for Government to maintain the current level of spending, while at the same time undertaking measures to maintain employment and the network of social support.
10. What does Moody’s downgrade of Barbados’ short-term and long-term bond ceilings indicate?
These ceilings are distinct from the sovereign foreign rating and are the rating agency’s assessment of the highest corporate rating that can be assigned to a Barbadian company seeking to be rated. Having this ceiling serves to ensure that the ratings of private companies in a country, are in line with that of the sovereign.
June 20, 2011