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Rating Action:

Moody's affirms Barbados Caa1 ratings; maintains a stable outlook

14 Jul 2021

New York, July 14, 2021 -- Moody's Investors Service ("Moody's") today affirmed Government of Barbados Caa1 issuer ratings and withdrew the Caa3 senior unsecured bond rating. The outlook remains stable. The key drivers behind the rating decision are:

1. Fiscal risks have not materially increased despite the severity of the pandemic shock;

2. Structural reforms to support medium-term growth prospects and fiscal sustainability

3. Increased level of foreign exchange reserves supports Barbados' external position

RATINGS RATIONALE

RATIONALE FOR THE ISSUER RATINGS AFFIRMATION AT Caa1

FISCAL RISKS HAVE NOT MATERIALLY INCREASED DESPITE THE SEVERITY OF THE PANDEMIC SHOCK

Prior to the pandemic, Barbados had made significant progress towards addressing the root causes that led to the sovereign default in 2018. The government had achieved high primary surpluses and implemented structural reforms to reduce fiscal vulnerabilities.

Despite the severity of the pandemic shock, which caused Barbados' tourism-dependent economy to contract around 18% last year, we assess Barbados' fiscal risks to remain broadly stable. The economic shock resulted in a sharp drop of government revenues, and the economic contraction raised the debt-to-GDP ratio significantly. However, we expect the economic recovery that started this year to gain momentum leading to a turnaround in government revenues and partially reverse the deterioration in debt metrics.

As economic activity normalizes, we expect government debt as a share of GDP to report a downward trajectory and fiscal accounts to record a primary surplus of around 5 percent of GDP in FY2023/24 and stay around that level for the following years . The government remains committed to reaching the debt target of 60 percent of GDP by 2035, two years later than initially anticipated. To reinforce debt sustainability, the government is planning to adopt a fiscal framework which would require the government to prepare and publish its annual fiscal strategy and medium-term fiscal objectives, and to enhance transparency and accountability in fiscal policy making while retaining sufficient flexibility to respond to the pandemic.

Notwithstanding the increase in the government's debt burden, debt affordability will remain much improved as a result of meaningful interest rate reductions following the debt restructuring. Although the government's interest burden will rise over the next two to three years as a result of the step-up coupons, we estimate interest payments will be equivalent to about 15% of government revenue, well below the 26% average prior to the debt restructuring.

STRUCTURAL REFORMS TO SUPPORT MEDIUM-TERM GROWTH AND DEBT SUSTAINABILITY

Over the past several years, the government has taken significant steps to strengthen its fiscal and monetary policy frameworks, which will allow Barbados to maintain sound policies supporting the recovery from the pandemic.

Strong reform momentum is evidenced by five successful reviews under the IMF-supported economic reform program with the latest completed in June 2021. Barbados' Parliament passed the Financial Management and Audit Act (FMA) in January 2019, which ushered in a wave of reforms that hold the central government and large state-owned enterprises (SOE) sector to higher standards of budget transparency and accountability. The FMA Act established stringent reporting requirements for SOEs, as well as sanctions for noncompliance. Opacity in the SOE sector, which accounts for about 40% of public sector expenditures, had been recognized as a key factor behind the fiscal deterioration of the last decade.

In December 2020, Barbados' parliament adopted the Central Bank of Barbados Act which enhances the autonomy of the central bank The Act prohibits financing to the government or SOEs, except in the event of a public emergency, upon which the central bank can provide financial support to the central government for up to 3% of GDP. The new framework will bolster the independence of the central bank, an outcome that will support macroeconomic stability as well as institutional strength and governance.

The government has outlined future areas of reform, including tax administration, civil servant pension reform, and the introduction of a fiscal rule to support medium-term fiscal sustainability.

INCREASED LEVEL OF FOREIGN EXCHANGE RESERVES SUPPORTS BARBADOS' EXTERNAL POSITION

Despite the collapse in the tourism sector, Barbados continued to build up its international reserves, supported by IFI loans. Reserves increased to US$1.3 billion in 2020, the equivalent of 9 months of import coverage. The current account deficit increased to 7 percent of GDP in 2020 due to the collapse in tourism, but this was more than offset by large official inflows.

Reserves have grown significantly since the 2018 debt restructuring, and we expect them to remain high, supported by gradual recovery in tourism and multilateral disbursements. While the pandemic will continue to limit tourism-related foreign exchange flows during 2021, we expect reserves will continue to provide an adequate buffer against external shocks remaining high in absolute an relative terms. We estimate that the current account deficit will reach about 8% of GDP in 2021, up from 6.3% of GDP in 2020, before narrowing toward 4% in the following years as tourism earnings begin to normalize. We believe the government's external refinancing risk is mitigated by its favorable amortization schedule as well as $163 million in additional financing from the IMF.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Barbados' high level of indebtedness and subdued growth performance, balanced against strong reform efforts that have reduced fiscal vulnerabilities prior to the pandemic. Despite the severe economic shock, reform efforts have continued and we expect the recovery in economic activity to support a path of fiscal consolidation similar to that observed in the fiscal accounts before the pandemic which was associated with high primary surpluses and downward debt trajectory. On the other hand, the speed of the recovery of the tourism sector remains uncertain, which poses risks to Barbados fiscal outlook.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

We assess Barbados' exposure to environmental risks as moderately negative (E-3 issuer profile score) reflecting exposure to physical climate risk; through its exposure to weather-related shocks and reliance on the tourism sector.

Exposure to social risks is moderately negative (S-3 issuer profile score), due to negative demographic trends, balanced against adequate provision of basic services, a welfare state, and relatively strong education outcomes. Future social pressure may arise if economic growth remains subdued post-pandemic, leading to weaker fiscal consolidation.

Strong institutions and governance support Barbados' credit profile, balanced against a recent history of default, leading to a moderately negative exposure to governance risk (G-3 issuer profile score).

GDP per capita (PPP basis, US$): 13,553 (2020 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -18% (2020 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.3% (2020 Actual)

Gen. Gov. Financial Balance/GDP: -4.9% (2020 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -6.4% (2020 Actual) (also known as External Balance)

External debt/GDP: 56.1%

Economic resiliency: ba3

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 08 July 2021, 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 economic fundamentals, including its economic strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upward pressure on the rating would materialize if in addition to the resumption of the fiscal consolidation process, growth rebounds sufficiently to reverse pandemic-related increases in debt burden with primary surpluses, leading to a sustained reduction in government debt metrics. The successful implementation of structural reforms that lead to higher medium-term economic growth and improve competitiveness would also improve the sovereign's credit profile.

The rating would come under downward pressure if the government fails to resume fiscal consolidation efforts and elevated deficits lead to an additional buildup of government debt. A reversal of the recent recovery in foreign-exchange reserves and renewed pressure on the currency peg would also introduce downward pressure on the rating.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Samar Maziad
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Alejandro Olivo
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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