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Barbados reserves steady in 2014: Standard & Poor's

Barbados reserves steady in 2014: Standard & Poor's

Posted by Shanelle Weir on August 11, 2014

Barbados 'BB-' Long-Term Rating Affirmed; Outlook Remains Negative

OVERVIEW

• The ratings on Barbados reflect its large fiscal deficits and high debt burden, as well as its limited fiscal flexibility and a decade of weak economic growth.

• Barbados' stable, predictable, and mature political system, which benefits from consensus on major economic and social issues, including support from the private sector and trade unions, partly counters these weaknesses.

• We are affirming our 'BB-/B' sovereign credit ratings on Barbados.

• The negative outlook reflects the potential for a downgrade if the government fails to meet its fiscal adjustment targets or if there are signs the economy may fail to grow next year.

RATING ACTION

On Aug. 8, 2014, Standard & Poor's Ratings Services affirmed its 'BB-' long-term and 'B' short-term sovereign credit rating on the government of Barbados. The outlook remains negative.

RATIONALE

The ratings on Barbados reflect its large fiscal deficits and high debt burden, as well as its limited fiscal flexibility. However, the country has a stable, predictable, and mature political system, which benefits from consensus on major economic and social issues, including support from the private sector and trade unions for the government's ongoing fiscal and structural adjustment program.

Barbados' economic fundamentals remain weak, with average annual real GDP growth of just 0.3% during 2010-2013 (which is slightly negative on a per capita basis). We expect no growth in 2014 and a slow recovery in 2015-2016 based on a pickup in tourism and construction (in both the private and public sectors). The government's fiscal adjustment strategy, announced in December 2013, will constrain domestic demand, raising the importance of stimulating private investment (especially in tourism projects) to achieve the projected higher GDP growth averaging 1.5%-2% over the next several years. With a slow recovery and public-sector layoffs, unemployment will likely remain high, after reaching 11.7% in 2013.

Standard & Poor's expects the net general government debt burden to rise to above 80% of GDP in fiscal 2014 (ending March 2015) from 75% in fiscal 2013 and 67% in fiscal 2012. Barbados uses more than 15% of general government revenues to pay interest on its debt.

Including National Insurance Scheme (NIS) surpluses, the general government deficit rose to 9.7% of GDP in fiscal 2013 from 6.2% in fiscal 2012. We expect the deficit to fall to nearly 7% in fiscal 2014 as a result of the government's fiscal consolidation plan, and further to 4.4% in 2015. However, risks remain from the sluggish outlook for the country's main economic sectors, especially in the context of the fiscal adjustment program already underway, high unemployment, and mounting spending pressures.

External pressures remain as well. However, Standard & Poor's expects the Barbados dollar peg to hold--a key assumption underpinning Barbados' creditworthiness. The current account deficit reached over 10% of GDP in 2013, which, in absence of foreign direct investment and external financing, resulted in pressures on international reserves. A private placement at the end of the year and further US$75 million in March 2014 helped boost international reserves. The level of reserves has remained relatively steady during 2014, and we expect it to remain largely unchanged by year-end and over the next several years because of our expectations for a lower current account deficit and increased foreign direct investment. The banking sector has deleveraged steadily since 2008, and the external debt of the financial sector fell to US$375 million in 2013 from more than US$869 million in 2008. 

We assume this deleveraging has come to an end. 

OUTLOOK

The negative outlook reflects the potential for a downgrade if the government fails to meet its fiscal adjustment targets or if there are signs the economy may fail to grow next year--for example, should planned tourism projects stall--resulting in further increases in the sovereign's debt and interest burdens. Mounting external pressures that lead to a decline in reserves could also lead to a downgrade. 

We could revise the outlook to stable if the government significantly reduces its general government fiscal deficits, leading to a declining debt and interest burden in the next three years. Better economic growth prospects and a successful fiscal consolidation program could also lead to a stable outlook.

RATINGS

Ratings Affirmed

Barbados

Sovereign Credit Rating BB-/Negative/B 

Transfer & Convertibility Assessment BB- 

Senior Unsecured BB-

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