Country risk: Little sunshine in Barbados
The sovereign’s risk score has been falling for the past two-and-a-half years, culminating in overdue action by Moody’s.
With risk experts at Euromoney Country Risk shaving another 2.1 points from the Caribbean island’s score during Q2 2014, Barbados has slipped further down ECR’s global rankings to 77th out of 186 sovereigns worldwide, as of July, and deeper into the fourth of five tiered categories commensurate with a B- to BB+ credit rating.
A three-notch downgrade by Moody’s has seen its creditworthiness slip to B3 (negative). It is BB- (negative) on S&P’s scale.
As the problems mount for officials in Bridgetown, risk experts have long been questioning the ability to lower a budget deficit revised higher to 12.4% of GDP during the fiscal year (FY) 2013/14 that concluded on March 31.
That is putting the 6% to 7% target for FY2014/15 out of a reach, with the sovereign’s rising credit risk effectively denying the state access to the international markets.
All 11 of Barbados’s political and economic risk indicators have been downgraded from a year ago, with the government finances scoring worst of all on just 1.9 out of 10:
Central bank data showing an economy flat-lining in 2012-13 failed to produce any growth during the first half of 2014, with tourism flattened by weakened source economies, increased UK air-passenger duties and competition in the high-end, boutique holiday market.
An unemployment rate stuck at 11.7% according to the central bank, but undoubtedly higher when factoring in the latest public sector layoffs, is harming efforts to raise the tax take and worsening the public accounts burdened by severance and welfare payments.
Marla Dukharan, group economist at RBC Caribbean, notes the authorities have “sought to partly finance the deficit by printing money, resulting in pressure on the currency peg with a drop in foreign-exchange reserves”.
While providing an estimated 15 months of import cover as of June, sufficient to finance all debt and interest payments in 2014, the reserves position is a third lower compared with the peak in 2007, with coverage falling by around 10% since H1 2013.
Rising debt interest costs will further burden the sovereign, not least because of the mystique involved in debt reporting, with central-bank accounting generating an artificially low figure that is 30% of GDP or so less than the truer IMF estimate of more than 120% of GDP.
The authorities will seek to defend the currency peg, but falling creditworthiness is pointing toward a domestic debt restructuring, a more flexible currency regime and balance-of-payments support from the IMF.
Barbados-based Ryan Straughn, managing director and CEO of Abelian Consulting, believes the risks might continue to rise for a while.
“There has been no significant reduction in public expenditure, and interest costs keeps rising because of the fiscal policy being employed,” he says.
“The economy is still declining and as such tax revenue performance has stalled and the fiscal deficit is not significantly less than that for the same period in 2013. That makes it difficult for the authorities to effectively implement the adjustment they identified.”
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