Both The Bahamas and Jamaica were again downgraded by Standard & Poor’s (S&P) last week.
S&P cited several reasons for The Bahamas downgrade that were captured under the rating agency’s new guidelines for rating sovereigns which it published on June 30.
These new guidelines require that “heavier weight be placed on economic diversity and growth prospects”.
The Jamaica downgrade reflected the continued struggle with very high levels of debt, political uncertainty and few avenues for growth, despite the country showing signs of improvement.
The Bahamas, which has a much stronger economy in a relative sense, was downgraded on the back of relative credit weakness, dependence on one sector, a deteriorating fiscal profile and growing Government debt.
The obvious question that arises is: within the context of this new thinking by S&P, what will happen when S&P next rates Barbados?
The Central Bank of Barbados is of the opinion that it is unlikely that Barbados will be downgraded and has cited a number of reasons why, including an improving balance of payments and an improving fiscal situation at home.
It seems to this writer, however, that on the basis of the new rating guidelines and the similar economic problems that Barbados has to The Bahamas, another downgrade for Barbados is much more likely.
This is even more the case when considering that even the United States was recently downgraded for the first time in its history.
Whether or not Barbados gets downgraded is still to be seen. The good news is that the Central Bank has already started to go through the “what if” scenarios and to put measures in place to maintain the crucial stability in the liquidity, interest rate and foreign exchange environments.
The problem remains, however, that Barbados has very little room within which to manoeuvre and further downgrades could have significant economic downside effects for Barbados.
In short, and notwithstanding the difficulties in implementing the necessary economic reforms, Barbados has no choice but to take whatever actions are necessary to limit the downside impact and pull itself out of the difficult environment we currently find ourselves in.
• Charles Chambers is managing director of Royal Fidelity.
