Barbados has not had an investment grade credit rating for more than ten years and to get one, Government will have to significantly improve the country’s fiscal performance.
Experts at global credit rating agencies Fitch Ratings and Standard & Poor’s (S&P) made that clear last week, in response to questions from Barbados Business Authority.
Their view was shared as Central Bank Governor Dr Kevin Greenidge told his third-quarter press conference on Wednesday that even without an investment grade Barbados was seeing the benefits of improved credit ratings from these agencies.
Greenidge said there was a need to “solidify the gains we’ve made, continue in terms of the strong fiscal performance, continue the work we have done in terms of strengthening growth and diversification and continue primarily with the debt [management]”, with the objective to regain a coveted top credit rating.
On October 9, Fitch affirmed Barbados’ ‘B+’ credit rating and changed the outlook from stable to positive. Then on October 24, S&P announced its credit rating for Barbados was upgraded from ‘B’ to ‘B+’ with a stable outlook.
This means that Barbados’ ratings from the two rating agencies remain in non-investment grade, otherwise known as speculative or junk. That is also the case for Moody’s Investors Service, which upgraded Barbados’ long-term issuer rating to B2 from B3 with a stable outlook in April.
Asked about the prospects for Barbados ultimately getting an investment grade rating in the future, Joshua Grundleger, director of sovereigns at Fitch Ratings, said that “analytically, improvements in fiscal metrics
are key to further upgrades for Barbados”.
“Barbados has a rating of ‘B+’ with a positive outlook, which is four notches below investment grade – ‘BBB’. As we highlighted in the recent report and rating action, when we affirmed the rating and changed the outlook to positive), the following factors could lead to an upgrade,” he stated.
Those factors are: Public finances: Preservation of high primary surpluses that lead to a continued sharp reduction in the government debt/GDP ratio.
Public finances: Continued demonstration of improving access to financing sources beyond multilaterals, for example, through a deepening of the domestic debt market.
Macro: Higher trend growth driven by progress on economic reforms or stronger investment.
Grundleger elaborated, stating: “As you may be aware, our analytical framework has two pillars: one, a quantitative model and two, qualitative overlay that adjusts the model output up or down.
Mechanically, a change in one of these could lead to a rating change, so for instance, an improvement in the underlying metrics that moved the model, absent an analytical view of a need to offset that model change with an addition or removal of a qualitative notch, would be one path to a rating change.”
“Further deepening and greater institutionalisation of the fiscal policy framework would also support the credit profile,” he said.
“Likewise, diversification of the economy and improved resilience vis-à-vis external risks would also be supportive. Multiple notch improvements in credit ratings generally take a number of years, but the precise path is obviously subject to many factors and uncertainties.”
While Government is targeting a debt to GDP ratio of 60 per cent by fiscal year 2035/2036, Grundleger said Fitch did not “do not forecast a debt path out that far”.
He stated: “But I think hitting the target is ambitious but possibly achievable if strong fiscal discipline is maintained and a severe shock is avoided.
Grundleger’s overall conclusion was that “maintaining fiscal discipline is key, which will inevitably become challenging as policy priorities change and needs arise”.
“The risk of shock, whether a downturn in the tourism industry or a large external event such as a hurricane, could cause difficulties. Domestic financing flexibility is improving but could serve as a constraint. Likewise, a slow down in the economy, say from reduced investment, could also serve as a drag on the credit profile,” he said.
