BARBADOS SLIPS ONE FURTHER STEP DOWN THE LADDER

13 March 2017


 

 

 

 

 

 

 

 

 

A Firstline Securities Limited Blog by: Mike

SLIP SLIDING AWAY?

Standard & Poor’s (S&P Global Ratings) recently-issued rating actions with regard to Barbados has pushed this country one step further down the ratings ladder.

The rating actions issued by S&P Global Ratings were as follows:

  • The long-term foreign and local currency sovereign rating was lowered from “B-” to “CCC+” and the overall outlook was characterised as “negative.”
  • The short-term ratings were lowered from “B” to “C”.
  • The transfer and convertibility assessment for Barbados was lowered from “B-” to “CCC+”.

THE RATIONALE FOR THE CHANGE

S&P Global Ratings have downgraded Barbados based on several factors:

  • The government of Barbados has not succeeded in reducing high fiscal budget deficits. In 2016 net general government debt amounted to 101% of GDP and S&P Global Ratings expect it to rise to 111% over the next three years.
  • Deficits have been wholly financed by using the funds of Central Bank of Barbados, and to a lesser extent the resources of the National Insurance Scheme of Barbados and foreign reserves. Barbados’ ability to continue to utilise these sources and dwindling foreign reserves is limited moving forward. The level of foreign reserves has fallen to a paltry US$341 million at the end of 2016.
  • Dependence on Central Bank financing severely restricts the ability of Barbados to continue to peg its currency to the US dollar, and places the role of the Central Bank as the “lender of last resort” in jeopardy. Pressure on the exchange rate is compounded by a high current account deficit (CAD).
  • Barbados has limited prospects for raising private sector funding in local markets, and has experienced a significant decline in the level of external funding it previously enjoyed.
  • Although Barbados remains one of the richest countries in the Caribbean with a GDP per capita of US$15,800.00, growth is lower than many of its peers, and the economy remains highly dependent on tourism. While three major hotel projects have been announced, two of those projects are delayed. Given those delays, and the inability of the government to correct the economic problems noted in the other bullets above, S&P Global Ratings do not expect this high GDP per capita to be sustainable moving forward.
  • S&P Global Ratings are quite critical of the government of Barbados stating “that its negative outlook reflects its view that Government was either unable or unwilling to take timely steps to redress the situation.”

IN CASE YOU’RE WONDERING – WHAT IS A CREDIT RATING?

Credit ratings are opinions issued by credit rating agencies. Credit rating agencies are private companies that exist to sell their financial analysis to clients. These clients are usually investors or potential investors.

Credit rating agencies mark potential investments using a scorecard system and each of the three main agencies (Moody’s, Standard & Poor’s and Fitch) have their own unique scoring system. The main scoring system used by S&P Global Ratings runs from “AAA” to “C”. There is also a “D” rating. A “D” rating represents an obligation that is in default of, or in breach of, an imputed promise.

In the case of countries, when an agency writes a report they are assessing the creditworthiness of that country. A rating represents an assessment of that country’s ability to pay back its debts. Perception is everything. The less likely a country is perceived to be able to pay back its debts the lower the rating, and if current conditions and circumstances suggest greater impairment on that ability to repay, the rating is lowered.

When a rating deteriorates, or a downgrade occurs, it becomes harder and more expensive to raise finance.

THE MEANING OF A “B” RATING

Barbados previously had a “B” rating.

Per the S&P Global Ratings scorecard an obligation rated “B” is more vulnerable to non-payment than obligations rated “BB”, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.

THE MEANING OF A “CCC” RATING

Using the same scorecard referred to above, an obligation rated “CCC” is currently vulnerable to non-payment, and is dependent upon favourable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of an adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitments on the obligation.

A “CCC” rating is one rung above a “D” rating.

ROUGH WATERS AHEAD: A SMATTERING OF OLD CLICHÉS AND A VERY HARD BREXIT!

Barbados must chart some rough waters ahead, and this is before the true impact of BREXIT and its impact on the UK has really hit and takes a real dent out of the tourism market in 78 Barbados.

Consider the following:

  • Barbados enjoys a very close relationship with the United Kingdom (UK) as a member of the Commonwealth, and accordingly has a heavy reliance on income earned from British tourists. Moreover, Barbados has traditionally enjoyed the benefit of significant British investment in tourism related projects.
  • Downward pressure on the pound (since the BREXIT referendum the exchange rate against the pound has fallen from B$3.20 to B$2.44 at the time of writing of this blog entry) has and will continue to result in a decline in the spending power of tourists coming from the UK.
  • Barbados would not have suffered the full impact of BREXIT in 2016 as most visitors from the UK would have booked and paid for their 2016 vacation prior to the referendum result and the subsequent fall in value of the pound. The impact on visitor numbers for 2017 is likely to be more severe as the effects of BREXIT in the UK start to bite and Article 50 is triggered.
  • Barbados remains a “one trick pony” with all its “eggs in one basket” – tourism.
  • The UK hasn’t really experienced the full impact of BREXIT yet. In 2016 the UK economy defied expectations as the British displayed their “Dunkirk Spirit” and kept spending. 2017 will be a different story. Expect surging prices on the back of a weak pound to lead to a significant cut in consumer spending. One of the first things that is likely to disappear from the average household budget is the expensive overseas holiday as the average “Brit in the street” tries to “make ends meet.”
  • Barbados faces the “double-whammy” of rising oil prices as crude continues its slow recovery, and higher interest rates as it seeks to find new sources of finance.

Rough waters ahead indeed!

CLOSING THOUGHTS – A TIME TO ACT, A TIME TO INVEST?

Firstline Securities Limited offers comprehensive coverage of local and international markets with a bias for the energy sector. Firstline offers a number of unique opportunities to put surplus cash to work either as your asset manager or investment advisor. Please contact us for more details at info@nullfirstlinesecurities.com or at 868.628.1175. We can discuss your investment needs in detail and craft a portfolio that makes sense for you. We look forward to hearing from you!

 

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