CREDIT RATINGS are an important benchmark for creditors and investors. Credit ratings are an assessment of the obligor’s capacity and willingness to meet its financial commitments. As a result, they are reflected in the yields, which move inversely with prices, that countries can obtain when they issue debt.
In addition, since the ratings reflect the risk of economic distress, they provide an indication of the risk for foreign investors in a country. As such, they play an important role in today’s globally linked economy.
The credit ratings are subjective assessments made by the various agencies. Rating agencies vary both in the weight they apply to different indicators and the scale they use. Nevertheless, ratings across different agencies are usually comparable.
Rating agencies analyse different factors that indicate the ability and willingness of obligors to fulfil their debt obligations. Key factors include institutional and governance effectiveness and security; economic structure and growth prospects; external liquidity and international investment position; fiscal performance, flexibility and debt burden; and monetary flexibility.
In addition to the rating, the agencies also given an outlook – negative, stable or positive – indicating the stability of the rating going forward.
A credit rating is required to access international financial markets, so countries without market access are not necessarily rated. With the exception of Guyana, all the countries of the Inter-American Development Bank Caribbean Country Department (CCB) have a credit rating. The ratings of Trinidad and Tobago and The Bahamas are the highest (at investment grade), while Jamaica’s rating is the lowest, a speculative level (high credit risk).
Ratings for the CCB could remain under pressure. In line with other commodity producers, the prospects for economic growth, fiscal balances, and the external situation for Guyana, Trinidad and Tobago and Suriname have become more challenging. Jamaica’s outlook has improved, but the country is still recovering from a severe recession and remains vulnerable. In addition, The Bahamas and Barbados are experiencing pressure owing to weak economic environments. The external environment might also challenge current ratings. The likely increase of target interest rates in the United States (US) over the next few months might put upward pressure on global interest rates and could reduce capital flows into emerging markets. This normalisation of interest rates could negatively affect the fiscal and external situation of all CC countries.
Credit ratings play an important role in today’s globalised financial sectors. Assessing the risk of a debt default by a sovereign nation is a highly complicated as well as data – and time – intensive task. Reflecting economic challenges, credit ratings in the CCB have experienced downward pressure. Given the clout of credit rating agencies, financial market access for CCB countries has become more challenging.
Credit ratings will remain under pressure for most of the countries. Commodity producers are experiencing the effects of low commodity prices, while tourism dependent countries have faced below average growth rates for an extended period. In addition to weak economic growth, these countries have also built up fiscal vulnerabilities with high and rigid expenditures relative to revenues and increasing debt. The expected increase in US interest rates could put further pressure on the fiscal and external situation.
Taken from a recent report produced by the Inter-American Development Bank’s Caribbean Country Department.
