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13 Jun 2011
New York, June 13, 2011 -- Moody's Investors Service has downgraded the Government of Barbados'
domestic currency rating to Baa3 from Baa2. The Baa3 foreign currency
bond rating has been affirmed. The outlook on both ratings has
been revised to negative.
The main triggers for today's action are as follows:
1. Moody's increasing concerns about the capacity of the
domestic market to continue to absorb the elevated levels of government
debt issuance at the same time that the country's already large
current account deficit is expected to increase further due to the recent
rise in oil prices;
2. Our view that the government's debt ratios are likely
to deteriorate further over the next 12 to 18 months to levels that are
no longer consistent with an investment grade rating given the small size
and limited diversification of Barbados' economy.
Moody's has also downgraded Barbados long and short-term
foreign currency bond ceilings to Baa1 and P-2 respectively,
its short term foreign currency deposit ceiling to P-3, and
its local currency bond and deposit ceilings to A1.
The downgrade of the domestic currency rating considers Moody's
view that the primary credit strength that historically enabled it to
achieve a higher rating than the country's foreign currency obligations,
namely the existence of a large captive market for domestic currency government
paper that is the product of capital controls, has eroded.
While capital controls may in some cases help to limit rollover risk of
domestic currency debt, Moody's has increasing concerns about
the capacity of the domestic market to continue to absorb the elevated
levels of government debt issuance at the same time that the country's
already large current account deficit is expected to increase further
due to the recent rise in oil prices. Furthermore , Barbados
has begun to liberalize these controls creating the possibility that the
remaining controls could be circumvented should incentives be great enough.
To the extent the controls hold, they could actually be as beneficial
to the government's ability to repay its foreign debt obligations
as its domestic obligations as they would permit the government to marshal
foreign currency for the repayment of its foreign debt. In addition,
we note that the government's desire to defend the currency in the
face of potentially increasing pressure on the fixed exchange rate could
reduce its flexibility to try to avoid a default on the domestic currency
debt by printing money. The unification of the government's
local and foreign currency ratings is consistent with the approach laid
out in Moody's "Sovereign Methodology Update: Narrowing
the Gap -- a Clarification of Moody's Approach to Local Vs.
Foreign Currency Government Bond Ratings."
The downgrade of the local currency ceilings is linked to the downgrade
of the government's local currency bond rating. The downgrade
of the long-term foreign currency bond ceiling reflects our opinion
that the risk of a payment moratorium that would enable the government
to preserve foreign currency resources is now slightly higher due to trends
in the country's balance of payments and government finances.
The revised ratings for the short-term foreign currency bond and
deposit ceilings are consistent with the respective long-term ratings.
The negative outlook considers Moody's view that the government's
debt ratios are likely to deteriorate further over the next 12 to 18 months
to levels that are no longer consistent with an investment grade rating
given the small size and limited diversification of Barbados' economy.
Furthermore, Barbados' limited growth prospects, a function
of its deteriorating competitiveness and declining productivity,
make it unlikely that it will be able to grow out of its debt burden in
the near-to-medium term. The negative outlook also
reflects our expectation that pressure on Barbados' fixed exchange
rate is likely to increase as a result of an anticipated increase in the
current account deficit coupled with the government's large fiscal
After a 4.7% drop in GDP in 2009 (which followed a 0.2%
drop the previous year), Barbados emerged from recession in 2010,
but just barely, posting growth of 0.3%. However,
Barbados' central government finances were severely impacted by
the recession. Its fiscal deficit climbed to 5.1%
in 2008 and reached 9.4% in 2009 due to a drop in tax revenues
coupled with a significant rise in countercyclical spending. The
deficit began to decrease slowly in 2010, dropping to 8.1%
of GDP or 27% of revenues, and this trend is projected to
continue this year, but Moody's anticipates that the government's
deficits will remain large for the next few years as the government pursues
a strategy of gradual fiscal consolidation.
As a result of these deficits, central government direct debt surpassed
100% of GDP and 350% of government revenues (up from 70%
and 230% respectively at the end of 2007). These figures
are the highest among countries in the Baa-category. Consequently,
Moody's has revised Barbados score for government financial strength
to low from moderate. This results in a shift in the rating range
suggested by our methodology to Ba1-B3 from Baa2-Ba1.
While the worst appears to be behind Barbados both in terms of fiscal
deficits and economic deterioration, large fiscal deficits are expected
to continue over the next several years as a result of which debt levels
will continue to rise, albeit at a slowing pace, before they
start to improve. Consequently Barbados will have considerably
less flexibility to respond to economic shocks in the future than it did
in the past, particularly given its fixed exchange rate which not
only eliminates the option of pursuing an independent monetary policy
but may constrain the government's fiscal flexibility even further
to the extent that continued deficits could put start to pressure on Barbados'
fixed exchange rate. Adding to this pressure is an anticipated
increase in the current account deficit, which rose to nearly 9%
of GDP from just over 5% the previous year. Moody's
expects it is likely to continue to rise in 2011 due to the recent increase
in oil prices.
The principal methodologies used in this rating were "Moody's Sovereign
Bond Methodology" published in September 2008, and "Sovereign Methodology
Update: Narrowing the Gap -- a Clarification of Moody's
Approach to Local Vs. Foreign Currency Government Bond Ratings,"
published in February 2010.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
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on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
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independent third-party sources. However, Moody's
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Please see ratings tab on the issuer/entity page on Moodys.com
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Please see the ratings disclosure page on our website www.moodys.com
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Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
MD - Sovereign Risk
Financial Institutions Group
Moody's Investors Service
Moody's Investors Service
Moody's downgrades Barbados' domestic currency rating to Baa3; outlook negative
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