Commentary & Analysis
Despite the pain, our fiscal health has improved
Patrick Hoyos
Oct 11, 2019
“On 27 June 2019, a rating committee was called to discuss the rating of the Barbados, Government of. The main points raised during the discussion were: The issuer's fiscal or financial strength, including its debt profile, has materially increased. The issuer has become less susceptible to event risks.” - Moody’s press release on Barbados, July 2, 2019.
Bus fare hikes, rising supermarket prices and the feeling that we are not moving forward notwithstanding, Barbados is doing better. Moody’s Investors’ Service thinks so, and has taken us up a notch, although not as high as Standard & Poor’s S&P late last year put us into the B category, which means “high credit risk.” Moody’s put us in its “Caa” band last week, meaning you have to add a “very” to the phrase.
Basically, we’re in a better fiscal position because we have renegotiated our domestic debt, which is about 80% of our total national debt. Our position has “materially” improved.
Now, you may remember the recent protest over how things were going by a lobby group representing (according to it) just over half of the foreign debt held. This group, the Barbados External Creditor Committee, accused the government in May of basically not acting in good faith in negotiations to restructure the foreign component of our public debt.
Under the first of two so-called scenarios, the government would give creditors new bonds worth two-thirds of their original principal, with interest payments made twice yearly, at 3.5 per cent in the first two years, and 7.5 per cent per annum until the 2033 maturity date.
In the second ‘scenario’, the bondholders would receive the full face value of the restructured bonds, but interest payments would be fixed at 3.5 per cent per annum until 2044.
But despite the unhappiness publicly vented by the creditor group, Moody’s is taking a surprisingly calm view of the matter, saying that while it expected the negotiations to be “protracted”, it believed that “losses to external commercial creditors will ultimately prove to be similar to those incurred by domestic creditors,” and that was why it assigned a Caa3 rating to outstanding foreign currency bonds.
I actually found that fascinating, given the dire warning meted out to the country by  that creditor lobby. It said that if Barbados tried to impose a “unilateral offer” based on either of the rejected “scenarios” this would “likely place economic reform efforts at risk, to the detriment of the country’s financial stability and well-being.”
In fact, Moody’s has pointed out in terms even a creditor could understand that “The very high level of indebtedness remains a key constraint on the rating.”
So, obviously, the country must get the debt lowered. We would only get a higher rating from Moody’s if we took actions “which provided assurance that the debt burden would continue to fall over the coming years.” Only three ways to do that - lower the interest rate, get a write-off of some of the debt, or get both at the same time.
Anyway, it seems to me that the tree advising the government is working for its money.
There seems to be another important reason for Barbados to stick to its guns despite the temporary negative publicity you would expect from the other side of the negotiating table.
Moody’s explained why it had decided to maintain a Caa3 "foreign currency senior unsecured" rating for Barbados’ foreign debt while upgrading Barbados' issuer ratings to Caa1. It must be confessed that I had to read it over two or three times before thinking I understood it a bit, but here is the rationale direct from the horse’s mouth:
The gap between the two “signals Moody's view that while it is extremely unlikely that the government will choose to issue into the international markets in the near future, were it do so the debt issued would carry a lower risk than the instruments currently subject to restructuring negotiations.” Which means we have to keep on the treadmill and get this debt burden reduced through negotiation.
Moody’s says the recent ‘turnaround in economic and fiscal policies” will help the country to reduce its public debt as we move toward the goal of reaching the government's target of 60% of GDP by 2033. But the next few years are critical to getting onto the right track. Our loan agreement with the IMF also calls for an increase in the primary surplus to 6.0% of GDP in this fiscal year.
So right now, we are running down a very narrow track with little opportunity to move left or right. That is why you don’t see the sort of innovation that I personally would like to see, especially with regard to renewable energy policies. It seems that we have little room to manoeuvre despite some concessions made by the IMF, which a few years ago, admitted that austerity by itself has had a fairly dismal track record. At some point we will have to give more innovation a chance in order to attract investment.
Posted 
Jul 4, 2019
 in 
Commentary & Analysis
 category

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