“Far too many Barbadians tend to believe they can live in splendid isolation from the rest of the world. ”
Tom Adams, then Prime Minister and Minister of Finance of the Caribbean island-nation, made that observation in the mid-1980s. His message was clear: Barbadians should spend less time beating their breasts about their wisdom, common sense and achievement but more on trying to fit their birthplace into the stream of international events and taking much needed action. He was right on the money.
Yes, it’s true Bajans understand that when the United States suffers an economic hiccup, their country can get a severe bout of pneumonia. But an unfortunate fact is that many unwisely insist that they don’t have to worry about the ebb and flow of economic and financial events outside their borders.
That bit of folly led many otherwise very intelligent souls to devalue the importance of Wall Street’s downgrading Barbados’ credit ratings. When both Moody’s Investor’s Service and Standard & Poor’s lowered the island’s investment-grade rating at the turn of the century to junk-bond status by 2013, some people who should have known better unwisely advised their neighbours and colleagues to ignore Wall Street’s action.
Barbados’ current BB rating with a negative outlook was described by Richard Francis, S&P’s lead analyst on Barbados, as three notches below investment grade, the lowest it has been in almost two decades. What’s worrisome is his warning that the country stands a one-in-three chance of seeing that rating downgraded again.
As it stand, says Francis, Barbados’ credit rating “isn’t among the“lowest of the low” but any further decline would make a bad situation worse and eventually hit Barbados in the pocketbook.
Bonds withdrawn
The reality should be clear. Chris Sinckler, Minister of Finance, went to the financial markets last year to borrow money to prop up declining foreign reserves couldn’t get an acceptable offer and had to withdraw the bonds largely because of the credit rating.
Obviously, Wall Street’s message had reached potential bond investors and it was that the risk of Barbados’ defaulting on its bonds had increased and to get the money it needed, the island had to pay a “premium”. It’s that straightforward. There is a nexus between the rating, an indication of risk, and the interest rate a country pays.
“The terms of the [Credit Suisse] loan are a concern,” said Aaron Freedman, Moody’s analyst.
“The interest rate was very high. I think it was LIBOR plus 700 and that is more or less consistent with the implied yields that the Government’s debt is trading at on the secondary market.
“Obviously there is a significant premium risk that the Government is paying. That has direct fiscal implications. If your interest expense rises, it makes it that much more difficult to achieve fiscal consolidation. Interest expense already consumes a significant portion of the Budget. We were expecting it would be close to 30 per cent of Government revenues, which is one of the highest levels we have seen anywhere.”
His point was underscored by a headline in a Bloomberg News story: Barbados Bonds At Record Yields As IMF [International Monetary Fund] Urges Restraint.
“Yields on Barbados’ 2021 dollar bonds were at a record 9.58 per cent at 12:16 p.m. New York Time [December 20[ and were up 33 basis points, or 0.03 percentage point, this week. The 2022 bonds trade at 9.61 per cent after rising to a record 9.64 per cent on December 18.”
That picture hasn’t improved much, if at all, since then. Clearly, Barbados’ declining credit ratings, the need to reduce the deficit through huge cuts in Government spending, and the decline in foreign reserves are the major reasons for the record-high interest rates Barbados is paying on its bonds.
And it explains something else: to reverse the trend, Barbados has to take tougher action in order to stabilize its finances and boost its credibility. So, despite the statements by unions about layoffs and the delay in accelerating the layoff by two weeks, Government must go ahead with its plans.
Any deviation would put what’s left of Barbados’ credibility in the tank.
“The market’s signal to Barbados is clear,” said Carl Rose, a managing director of Oppenheimer in Atlanta.
“Barbados must implement its adjustment report quickly and forcefully.”
The Barbados Workers’ Union and National Union of Public Workers may shout and scream but more painful cuts, even beyond the initial 3 000 tranche of layoffs, are needed to protect the currency, cut the deficit and reduce the debt.
Interestingly, John Welch, a strategist at Canadian Imperial Bank in Toronto, has thrown Barbados something of a lifeline for its credibility, saying he was convinced that the country can pull itself out of trouble.
“I expect them to be able to get through this,” Welch was quoted as saying.
“Their financing needs aren’t especially large in absolute terms.”
Let’s hope he is right.
