Commentary & Analysis
The greatest reality check of all
Dec 22, 2019
For those, like me, who were not only relieved but pleasantly surprised that Barbados has been moved up six spots on Standard & Poor’s ratings’ ladder, a quick injection of reality: We have a hard road to travel…
I will pause while everyone starts reciting Jimmy Cliff, as it does seem appropriate. My faith will see me through, is how that chorus ends, as you know.
Well, we need a whole lotta faith along with everything else because, as I was saying there are lots of rungs left on that ladder. I think I counted fifteen more.
And to make our dose of reality a little harder to bear, the level we have risen to still leaves us staring into the abyss. It is still in the “Highly speculative” category, and the lowest on that rung too. Above that are more “B’s” - “Non-investment grade speculative,” then “Lower medium-grade.” After that, the “A” await - “Upper medium grade,” then “High grade,” and then the pinnacle: “Prime.” But we are on our way.
And on what was this upgrade based? Last Wednesday, Dec. 11, 2019, says Standard & Poor’s, “Barbados exchanged approximately US$531 million in new 2029 bonds and US$32 million in past due interest bonds to holders of its U.S. dollar bonds that have been in default since 2018, of which approximately US$677 million, plus accrued interest, was outstanding.”
As a result, S&P said (bear with me), “we are raising our long- and short-term foreign currency ratings on the country to 'B-/B' from 'SD/SD' and are assigning our 'B-' foreign currency issue rating to the foreign currency debt delivered in the exchange.”
I put that in for the record, you know, but I really start to lose focus when all these ratings letters are flung around. Then, of course, we are provided with the negative scenario and the positive one. Don’t meet your fiscal targets - bad. Meet them - good.
We as citizens have been going through this for years and the only difference is that the current administration is actually trying, and so far succeeding, in meeting the IMF-imposed (inspired?) fiscal targets.
The former administration said that we were a sovereign state and who didn’t like that could go fund somebody else. Which was what happened as we climbed lower and lower down the ratings ladders.
The Mottley administration is actually carrying out the IMF’s plan and S&P summarizes the scenarios facing us.
The negative scenario is that “Failure to meet fiscal and debt targets over the next year could weaken investor confidence and result in a loss of official capital inflows,” putting renewed pressure on the country's foreign exchange reserves and reducing funding sources. It added, “Under this scenario of diminished liquidity, we could lower the ratings.”
However, on the positive side, S&P said “We could raise the ratings over the next year should the government adhere to its ambitious fiscal targets and reform agenda, which could strengthen investor confidence and contribute to improved GDP growth prospects.”
Here are a few points on how S&P sees the way forward in the short term for Barbados’ economy: It expects net general government debt will fall to 111% of GDP in 2019, and below 100% by 2022, from 137% in 2017.
Government interest payments will cost about 7% of general government revenues over the next three years, down from 16% in 2017.
This debt level is still high, but IMF resources under the extended fund facility (EFF) approved in October 2018 will provide balance of payment support, with about US$97 million already disbursed under the program and an additional US$48 million expected this December. The Caribbean Development Bank (CDB) and the Inter-American Development Bank (IDB) have also approved policy-based loans for US$75 million and US$100 million, respectively, and the CDB has also approved a US$40 million loan to upgrade infrastructure and services at Barbados' international airport. Also, said S&P, in November 2019 the IDB approved an additional US$40 million loan to support the modernization of the public sector in Barbados.
Still, with all of these good markers for Barbados, Standard & Poor’s offers the final dose of reality, saying it believes that the economy will contract further this year, and stay below 1% next year, mainly because of what it calls an “ambitious” fiscal consolidation program. It says: “We expect real GDP growth of negative 0.1% and positive 0.6% in 2019 and 2020, respectively.”
And here’s what you may find surprising, as I did: S&P says our greatest strength may be our greatest Achilles’ heel. Because Barbados defaulted on its loans it will be harder to raise new foreign loans on the private markets, and “it will take time to strengthen the credibility and effectiveness of the country's monetary policy.”
So despite having a GDP per capita of close to US$18,000 by the end of this year, and despite the country benefitting from a traditionally strong tourism sector, the agency said that “In our view, the economy's concentration in tourism will remain a credit weakness, because it exposes the country to greater economic cyclicality.”
And that, for me, is the greatest reality check of all.
Posted 
Dec 12, 2019
 in 
Commentary & Analysis
 category

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