MOODY’S DESISION to downgrade Barbados’ credit rating to Caa1 didn’t come as a surprise to many analysts who have been following the dismal performance of the Caribbean’s nation’s economy.
And after listening to Dr Delisle Worrell, Governor of Barbados’ Central Bank, at a town hall meeting in New York a few weeks before Moody’s rating action, it became clear to many present Moody’s seemed on course to downgrade Barbados, sending its rating of bonds deeper into junk territory. That’s a far cry from where it was in 2008.
Having lowered the rating in 2014, Moody’s was looking for tangible evidence that the Freundel Stuart administration was living up to its pledge to cut the deficit significantly but alas, the proof was missing in action.
Stated simply, the deficit was still too high and the country’s debt to GDP (gross domestic product) ratio, was officially pegged by the Central Bank at about 110 per cent of gross domestic product.
So, while Moody’s was listening to Worrell’s case for an upgrade, the Wall Street firm probably had its mind made up that the rating was going further into the cellar of junk.
The hard truth is that although the Government has made a few tentative and painful steps to reduce the deficit, much more needs to be be done in order to keep its word to Wall Street.
“Despite some progress to reduce the Government fiscal deficit and contain pressures on foreign exchange reserves, macroeconomic and credit risks remain elevated in Barbados,” was the way Moody’s explained its downgrade. “Debt burden remains very high and additional fiscal consolidation is needed to reverse its rising trend in debt burden.”
It went further: “Slow progress to narrow the fiscal deficit to sustainable levels continues to put pressure on foreign exchange reserves, placing the exchange rate peg at risk.” Although it didn’t say it in plain language, the rating agency’s message was clear: act aggressively now or some day soon Barbados may have to devalue its currency.
Asked for his reaction to the downgrade, Charlie Skeete, a retired senior economic advisor at the Inter-American Development Bank in Washington, said the Wall Street firm’s action was “justified given the debt profile of the country”.
How come? “The debt to GDP ratio has to be lowered,” he asserted. Stated another way, it was way too high.
“It has to be lowered below 90 per cent,” argued Skeete. “The Central Bank said it was 110 per cent but a number of agencies including the [Caribbean Development Bank] I think said it was 130 per cent. It has to go down below 90 per cent. How the Government reduces it is up to them but it has to be lowered.”
Next is the matter of the nation’s primary account, the fiscal account before any interest is paid on the nation’s debt was too low, 0.7 per cent.
“That is not good enough,” Skeete insisted. “That is less than one per cent and Moody’s said in its article on the downgrade that Barbados’ should be at least two per cent. Personally, I think three per cent is what Barbados could be aiming for. Moody’s wasn’t as tough on Barbados as it could have.”
Stated another way, Barbados must borrow approximately 90 per cent of the interest on its debt, thus worsening its profile.
“There is too much debt and there is too little GDP,” according to Skeete. “The debt has to be brought down and the GDP has to be increased. That’s it in a nutshell.”
Interestingly, Jamaica’s primary account is seven per cent, giving that country a much better financial position than Barbados. What a turn-around.
There is yet another aspect of the Moody’s downgrade. It is the downward trajectory of the rating. While it’s true that the junk bond rate makes it too expensive for Barbados to go into the international money market, the regular downgrades trigger intense scrutiny of Barbados financial picture by investors and ultimately induces a reluctance to put money into the country.
As it stands, there is declining international confidence in the Government’s ability to reverse the economic slide. The Stuart Administration continued insistence that the nation’s economic woes can be traced almost exclusively to the global economic debacle of 2007-08 is wearing thin.
In making the case for a rating upgrade, the Central Bank governor cited the return to economic growth and Barbados’ long record of never defaulting on a loan. That’s true. But the international financial community wants much more such as a rapidly expanding GDP, a sizeable drop in the deficit, a much better performance on the primary account and a decline in the debt-ratio.
Without that track record, Barbados can expect more downgrades. It’s that straightforward. With an election due in about two years, the Government is unlikely to take any action that would make its re-election unlikely if not impossible. That’s why we may not see any serious action to address the fundamental financial problems.
Sir Courtney Blackman, the Central Bank’s first governor, is optimistic that while not out of the woods, his birthplace may be on its way to better days.
“As long as the US economy continues to recover, I don’t worry too much about the Moody’s downgrade,” he said. “The Central Bank has apparently been able to provide the foreign exchange Barbados so far and I hope they will continue to do so. “
But that expression of hope doesn’t address a crucial issue: the nation’s economic management, which has been less than stellar.