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Rating Action:

Moody's affirms St. Vincent and the Grenadines' B3 issuer ratings; maintains stable outlook

01 Mar 2022

New York, March 01, 2022 -- Moody's Investors Service ("Moody's") has today affirmed the Government of St. Vincent and the Grenadines' long-term B3 issuer ratings and short-term non-prime rating, and maintained the stable outlook. The affirmation of the B3 ratings was driven by the following considerations:

1. Relatively modest impact of shocks on economic activity and expected recovery; however St. Vincent's economy remains vulnerable to climate shocks with limited diversification prospects

2. Debt projected to stabilize, albeit at higher levels, and debt affordability to remain stable; access to concessional financing provide liquidity for debt service payments

The stable outlook reflects Moody's expectations that growth will accelerate this year, following the pandemic shock and volcano eruption last year, which will facilitate fiscal consolidation and help stabilize debt burden.

St Vincent and the Grenadines' local-currency ceiling remains at Ba3 and foreign-currency ceiling remains B2.

RATINGS RATIONALE

FIRST DRIVER -- RELATIVELY MODEST IMPACT OF SHOCKS ON ECONOMIC ACTIVITY AND EXPECTED RECOVERY; HOWEVER ECONOMY REMAINS VULNERABLE TO CLIMATE SHOCKS

St. Vincent and the Grenadines was hit by two large shocks in quick succession. The pandemic hit in 2020 and, like much of the Caribbean, the economy suffered severe disruption in tourism activity as international travel came to a halt. The following year, an eruption of La Soufriere volcano destroyed part of the island economy and caused significant damage to housing and infrastructure. Despite these two large shocks, SVG reported a relatively moderate economic contraction in 2020 and small positive real growth in 2021.

The economy contracted by estimated 5.2% in 2020. In 2021, St. Vincent's economy expanded 0.8% in real terms. We expect real GDP growth around 4% in 2022 and medium-term growth to revert to pre-pandemic rates or around 2% on the back of ongoing rebuilding efforts and rebounding tourism activity. Government capital expenditures will provide strong support for growth in the next 2-3 years. In 2021, capital spending amounted to 8.1% of GDP, accounting for more than a fifth of total government spending.

The economy was supported by international financial assistance that SVG received from multilateral donors, which enabled the government to begin rebuilding work relatively quickly after the volcano eruption. Economic activity associated to rebuilding efforts and strong import had positive spillovers on government revenues through tax and import duties collection in 2021. We expect economic recovery to solidify this year, as reconstruction efforts continue and tourist arrivals rebound, as the pandemic continues to recede.

St. Vincent's economy, like much of the Caribbean region, is highly dependent on tourism and travel, which represents roughly 30% of economic activity and generated around 44% export receipts in 2019. We expect tourism arrivals to rebound in 2022-23 as the pandemic recedes further and travel from key markets i.e., US, UK and Canada resumes. However, recovery in the tourism sector will be contingent on the speed of post-volcanic eruptions recovery efforts and vaccine distribution domestically.

The island economy is reliant on tourism and has limited diversification prospects, which constrains the country's ability to achieve higher levels of sustained growth. Although the government has taken steps to support growth potential through infrastructure investment, including in the new airport and exploring geo-thermal energy, we do not anticipate growth dynamics to change significantly over the medium-term.

St. Vincent is part of the six member Eastern Caribbean Currency Union (ECCU). The Eastern Caribbean dollar (EC$) has been pegged at EC$2.7 to the US dollar in a currency board system since 1976. The monetary authority for the union, the Eastern Caribbean Central Bank (ECCB), holds reserves in excess of 100% of the union's monetary base to safeguard the peg, which has been stable since its inception. Membership in the union has provided St. Vincent with a stable exchange rate and an anchor for inflation.

SECOND DRIVER -- STABLE DEBT LEVEL AND INTEREST COST, BUT DEBT BURDEN WILL REMAIN ABOVE PEERS OVER THE RATING HORIZON

Moody's expects debt to increased marginally over the next 2-3 years due to ongoing construction efforts after the Volcano and large infrastructure projects underway; however debt will stabilize around 83% in next 2-3 years. As a result of pandemic and natural disaster shocks, fiscal performance deteriorated in 2020-21 and government debt increased from 67% of GDP to 80% in 2021. In the five years preceding the pandemic, debt levels had remained stable and below 70% of GDP on account of positive contributions from growth and primary surpluses.

Following a fiscal deficit of around 5% of GDP in 2020 and 2021, Moody's forecasts fiscal deficits to reach 7% of GDP in 2022 on account of continued infrastructure spending and transfers to the vulnerable. Before the pandemic, St. Vincent tended to maintain lower fiscal deficits. Overall fiscal deficit averaged just under 2.7% of GDP between 2010 and 2020, which compared favorably with the average deficit for the median B-rated sovereign of 3.4% of GDP over that same period.

Despite the increase in debt burden, which weakens the sovereign's fiscal profile, debt remains highly concessional and debt service remains manageable. Debt affordability will remain broadly stable, with interest-to-revenue ratio below 10% for 2022-23.

Liquidity risks remain broadly contained due to continued access to concessional funding from bilateral official creditors and multilateral development banks, which supports the island's infrastructure development projects and provides liquidity for debt service payments.

The government remains committed to reducing its debt burden over time, in line with ECCU criteria to 60% of GDP by 2035. A rebound in activity and higher sustained growth would be needed to facilitate debt reduction.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectations that growth will accelerate, which will facilitate fiscal consolidation and help stabilize debt burden.

ESG considerations

St. Vincent's ESG Credit Impact Score is highly negative (CIS-4) reflecting high exposure to environmental and social risks and moderately strong institutions.

St. Vincent's exposure to environmental risks as very highly negative (E-5 issuer profile score) reflecting high exposure to physical climate risk; through its exposure to weather-related shocks that can cause severe economic disruption to the island's vital tourism sector.

Exposure to social risks is highly negative (S-4 issuer profile score) due to low income levels and a deficiency in education outcomes and the provision of services.

St. Vincent's governance reflects the country's relatively favorable scores in the Worldwide Governance Indicators, balanced by a mixed track record of fiscal policy implementation. We assess exposure to governance risk as moderately negative (G-3 issuer profile score).

GDP per capita (PPP basis, US$): 12,750 (also known as Per Capita Income)

Real GDP growth (% change): -5.3 (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): -1.0

Gen. Gov. Financial Balance/GDP: -5.5 (also known as Fiscal Balance)

Current Account Balance/GDP: -0.1 (also known as External Balance)

External debt/GDP: 54.8

Economic resiliency: b1

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 24 February 2022, a rating committee was called to discuss the rating of the St. Vincent and the Grenadines, Govt 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 materially decreased. The issuer's susceptibility to event risks has not materially changed.

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

There is limited potential for a rating upgrade in the near term. Higher sustained economic growth, combined with a faster pace of fiscal consolidation, would be credit positive and support a higher rating. A significant improvement in the government's credit profile associated with a steady decline in the debt-to-GDP ratio could exert upward pressure on the rating.

Downward rating pressure could emerge if St. Vincent's access to external liquidity on concessional terms were curtailed, leading to liquidity pressures that impact debt service payments. If a large adverse environmental shock were to lead to a substantial deterioration in St. Vincent's fiscal and debt metrics or materialization of contingent liabilities from state-owned enterprises or increased commercial borrowing would be credit negative.

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_1288235.

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: 44 20 7772 5456
Client Service: 44 20 7772 5454

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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