IN RECENT YEARS Barbados has seen its credit ratings, as issued by leading entities Standard & Poor’s (S&P) and Moody’s Investors Service decline, to the point where it has been regarded as below investment grade, sometimes referred to as “junk territory”.
Such an ascription usually impacts on a country’s ability to borrow funds internationally, as financiers often use credit ratings as a reference point before they agree to a deal.
Closer to home, Barbados also receives a rating from Trinidad-based regional rating agency Caribbean Information and Credit Rating Services Limited. Last week it maintained its rating for Barbados, largely on account of the island’s “mild” economic recovery and the fact that the fiscal deficit has been reduced.
On the eve of a new year, one of the areas Barbados will have to pay major attention to if it wants its credit ratings to improve is its debt and fiscal deficit. The large amount of debt on Government’s books, when combined with other economic fundamentals, including lower than desired gross domestic product growth, is one of the reasons Barbados’ rating is now below investment grade.
This factor, which also affects other Caribbean ratings, was acknowledged by Moody’s in a report issued more than six months ago.
It stated: “Debt ratios are stabilising in Belize, The Bahamas, the Dominican Republic, Cuba, Bermuda, St Maarten and Trinidad. However, debt pressures are increasing in Barbados and St Vincent, while they are easing in the Cayman Islands. Nevertheless the overall stabilisation in debt levels in the region will help support current rating levels over the next 12 to 18 months.”
“The pickup in the tourism industry is credit positive for The Bahamas, Barbados, Belize, Bermuda, Cayman Islands, Jamaica, St Maarten, St Vincent and The Grenadines, because their economies depend heavily on tourism.”
Gabriel Torres, Moody’s vice president and senior credit officer added, however, that “although the rebound in tourism will help all Caribbean nations that rely on this industry, the individual credit effects will reflect each country’s dependence on this industry”.
The need for Barbados and other countries in Latin America and the Caribbean to boost their economic fundamentals was also highlighted by the International Monetary Fund (IMF) recently.
Alejandro Werner, director of the IMF’s Western Hemisphere Department, said growth in the region had been revised downward. and the new projection “implies that the average growth of real GDP in the reegion may be slightly negative this year (-0.3 per cent) before recovering modestly in 2016 (0.8 per cent).
“Reality has changed in Latin America and the Caribbean, and various economies in the region have sound fundamentals for dealing with this new environment. However, an adjustment in economic policies will also be necessary,” he said.
“First, foreign exchange flexibility can play a pivotal role in the adjustment of the economies to this new reality. In that sense, currencies depreciation caused by terms of trade changes and a worse growth outlook should be welcomed and accepted.”
He added: “But in countries where medium term inflationary expectations have remained above the mid-point of the target range, or where dollarisation is intense, it is more difficult to take advantage of foreign exchange flexibility – which highlights the benefits of continuing to improve the credibility and soundness of policy frameworks.”
He also said that “for the purposes of maintaining fiscal sustainability, it is essential for fiscal policy to be tailored to lower medium term growth and less income from commodity producing sectors”.
“Generall speaking, there is a need to reconstitute fiscal buffers in the region,” he said.
Essentially, Barbados’ ability to get a better credit rating is tied to its ability to improve economically, including GDP growth, reduced debt, and lower fiscal deficits.
In the past, some Government officials have downplayed the impact of credit rating downgrades by Moody’s and S&P.
Reacting to one such downgrade by Moody’s a few years ago, however, Minister of Finance Chris Sinckler took some lessons from it.
He deduced Moody’s was saying that the worst of the economy and fiscal deterioration was behind Barbados, that the island’s prospects for short-term high growth levels would continue to be challenged because of weaknesses in its major trading partners, and such challenges were likely to affect Barbados’ capacity to consolidate its fiscal deficit faster.
Time will tell if Barbados will have a better credit rating in 2016. A lot will depend on how the economy performs and policy decisions made by Government.