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Rating Action:

Moody's downgraded Barbados' government bond and issuer ratings to Caa3 and maintained a stable outlook.

09 Mar 2017

New York, March 09, 2017 -- Moody's Investors Service, ("Moody's") has downgraded Barbados' government bond and issuer ratings to Caa3 and maintained a stable outlook.

RATINGS RATIONALE

Moody's decision to downgrade Barbados' issuer and bond ratings to Caa3 was driven by the following factors:

1. The continued increase in government debt and very limited prospects of fiscal reform

2. In consequence, rising domestic and external financing pressures that are very likely to impair the government's ability to service its debt

Despite the government's efforts to contain the fiscal deficit and alleviate pressures on foreign exchange reserves, the fiscal deficit remains large and credit risks have increased in Barbados. The debt burden has risen in recent years and will continue to do so for the next few. Domestic and external liquidity pressures on the sovereign have increased. We assess the likelihood of a credit event in the near-term as very high, given lack of fiscal adjustment and increasingly limited financing options.

First Driver: The continued increase in government debt and very limited prospects of fiscal reform

Although macroeconomic conditions in Barbados have stabilized with a pick-up in growth, driven by rebound in tourism and investment in the sector, the fiscal deficit remains high.

The economy grew by 1.6% in 2016 after reporting anemic growth of less than 1.0% since 2010. The drop in oil prices and an increase in tourist arrivals temporarily alleviated some of the mounting pressures on foreign exchange reserves. However, reform efforts to address persistently large fiscal deficits since 2014 have not achieved a meaningful turnaround in fiscal performance, leading to what we consider to be an unsustainable increase in the government's debt burden.

The government debt burden reached 111% of GDP at end-2016, and the authorities have accumulated a large stock of arrears to the private sector and the National Insurance Scheme, estimated at a further 11% of GDP at end-FY2015/16. Large refinancing requirements and the high interest burden, which consumes around 27% of government revenues, pose increasingly severe credit risks.

Given the scale of the fiscal and structural reforms needed to correct the rising imbalance, the likelihood of a credit event is now very high.

Second Driver: In consequence, rising domestic and external financing pressures that are very likely to impair the government's ability to service short-term debt

With commercial banks having reduced their exposure to the sovereign, the government has become increasingly reliant on short-term debt issuance, financed by the Central Bank of Barbados, to meet the rising refinancing and interest costs. The rapid increase in short-term debt since 2013, allied with the large financing gap, imply mounting concerns about rollover risk. In 2016, the central bank was the only source of new financing for the government. As of end-2016, the central bank's holdings amounted to 34% of outstanding short-term T-bills, equivalent to 13.2% of GDP. The central bank's unwillingness to increase its exposure to the government would trigger a credit event.

External financing pressures are also high and rising. A number of factors, in particular maintaining the peg to the US Dollar, caused the stock of international reserves to drop significantly last year coming to USD 340.5 million in December from USD 463.5 twelve months earlier. This is the lowest level of reserves recorded since 2009, and only half the average level observed between 2009 and 2012, equivalent to under 11 weeks of imports at end-2016, compared to 13.6 weeks and 14.7 weeks in 2014 and 2015, respectively. The persistent decline in reserves continues to pressure the exchange rate peg.

Rising refinancing pressures dominate more positive credit features. Those include Barbados' moderately strong institutions, high governance indicators relative to peers, and stable political system that has historically supported a high degree of policy consensus. The government debt structure has relatively limited exposure to exchange rate risk with less than 30% of government debt denominated in foreign currency. The sovereign rating is also constrained by relatively weak growth compared to peers, and by the significant fiscal challenges.

STABLE OUTLOOK

The stable outlook on the Caa3 rating reflects the high probability of a credit event in the next 2-3 years, and reflects a balance of risks between lower and higher levels of loss given default.

WHAT COULD MOVE THE RATINGS UP

Upward pressure on the rating could build if the government initiates a credible fiscal consolidation program to arrest the rise in debt-to-GDP ratio and put debt on a sustainable downward trajectory. These developments would likely be accompanied by reduced reliance on short-term debt and financing from the central bank, and a rebound in international reserves.

WHAT COULD MOVE THE RATINGS DOWN

The rating would most likely come under additional downward pressure if, following a restructuring, losses imposed on creditors exceeded 35% in NPV terms, the highest level consistent with the Caa3 rating.

COUNTRY CEILINGS

The long-term foreign currency bond ceiling is changed to Caa2, while the short-term foreign currency bond ceiling is unchanged at NP. The long-term foreign currency deposit ceiling is changed to Ca, while the short-term foreign currency deposit ceiling remains at NP. The long-term local currency bond and deposit ceilings are changed to B3, while the short-term local currency bond and deposit ceilings remain unchanged at NP.

GDP per capita (PPP basis, US$): 16,670 (2015 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 1.6% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.7% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -8.2% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -4.6% (2016 Actual) (also known as External Balance)

External debt/GDP: [not available]

Level of economic development: Low level of economic resilience

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

On 06 March 2017, 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 institutional strength/framework, have decreased. The issuer's fiscal or financial strength, including its debt profile, has materially deteriorated. The issuer has become more susceptible to event risks.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. 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 ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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: 212-553-0376
SUBSCRIBERS: 212-553-1653

Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

No Related Data.
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