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Rating Action:

Moody's downgrades Barbados to Ba1; outlook negative

Global Credit Research - 20 Dec 2012

New York, December 20, 2012 -- Moody's Investors Service has downgraded the Government of Barbados' foreign and local currency bond ratings to Ba1 from Baa3. The outlook remains negative. Today's rating action was driven by two key factors:

1) The country's continuing lackluster economic performance

2) ongoing deterioration in the government's debt metrics.

Barbados's economy grew by just 0.6% in 2011 and 0.2% in the first nine months of 2012, well below expectations. Over the past ten years, Barbados has grown at a compound average annual rate of just 1.2%, among the slowest rates for countries rated by Moody's. While tourism arrivals rebounded strongly in 2011, returning to 2008 levels (and just 1% shy of their 2007 peak), this was driven in part by heavy discounting and tourism expenditures continued to decline to just 80% of 2007 levels. Furthermore, arrivals have started to decline again in 2012, falling 5% in the first ten months of the year. Unemployment now exceeds 12%.

Moody's believes that the country's growth prospects remain very limited due to its deteriorating competitiveness and declining productivity coupled with heavy dependence on tourism, particularly from the United Kingdom and the United States. Given the prospects for continued low economic growth in those countries, discretionary spending on travel is likely to remain subdued. In addition, Barbados' off-shore business sector, its second most important industry, also faces greater competition and is coming under increasing pressure from changes in tax laws in the U.S., Canada, and the U.K.

In response to the country's poor economic performance, the government loosened its fiscal consolidation targets last November, pushing back the deadline for achieving a balanced budget by two years to the fiscal year ending March 31 2017. While the fiscal deficit of 4.7% was smaller than expected for the fiscal year ending March 31, 2012, it remained quite large and it widened in the first six months of the current fiscal year to 5.9% (annualized). Debt/GDP equaled 80% as of March 31 this year (net of holdings of government paper by Barbados' National Insurance Scheme totaling an additional 30% of GDP), a ratio generally reached only by much wealthier countries with considerably larger economies, and it is projected to reach 83% by next March, up from 56% in 2009. Interest expense now consumes more than 20% of the government's revenues, significantly limiting its budgetary flexibility.

As a result, the government strategy of gradual fiscal consolidation relies upon optimistic growth forecasts, very tight control over expenditures that will be difficult to achieve, and continued high inflation -- which does not bode well for the country's competitiveness. While the worst appears to be behind Barbados both in terms of fiscal deficits and economic deterioration, Moody's anticipates that the government's deficits will remain large for the next few years and its debt levels will continue to rise, albeit at a slowing pace. Even if the country is able to consolidate its finances and stabilize its debt metrics, they are unlikely to improve meaningfully for the foreseeable future given its poor economic prospects. 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 significantly constrains the government's capacity to pursue a counter-cyclical monetary policy.

Notwithstanding today's rating action, Barbados continues to demonstrate certain key strengths that support its rating at the Ba1 level. It has one of the highest levels of GDP/capita relative to Ba peers and it continues to benefit from a strong reputation as a tourist destination. It also boasts strong public institutions and a stable political system supported by significant policy consensus. In addition, the government's debt structure is characterized by a well-termed out maturity profile and a high proportion of domestic currency debt - the government benefits from a dependable local creditor base. This limits refinancing and market access risk, though the capacity of the domestic market to absorb additional issuance is limited in our view. Finally, the banking system remains sound thanks in large part to the strong presence of Canadian-owned banks.

Moody's has also revised Barbados' local currency bond and deposit ceilings to Baa1, its long-term foreign currency bond and deposit ceilings to Baa2 and Ba2 respectively, and its short-term foreign currency deposit ceiling to NP.

The negative outlook considers that economic performance is likely to remain weak; that it will be progressively more difficult for the government to consolidate its finances given an increasingly rigid budget structure; and that debt metrics will continue to rise and financial flexibility to decline as a result. While access to a stable source of funding reduces roll-over risk, it does not ensure debt sustainability and it therefore remains crucial that the sovereign bring down its debt ratios in order to preserve creditworthiness. However, the government faces difficult choices in terms of stewardship of the economy: in the absence of significant corrective measures, debt metrics will continue to rise, and if the government does take such measures, it risks putting the economy back into recession. On the other hand, many of the proposals to boost economic growth carry the risk of continued deterioration of the government's financial position, at least in the near term. The outlook also reflects rising pressure on the country's foreign currency reserves, which continue to decline despite a reduction in the current account deficit, though Moody's believes they remain adequate for the time being.

The rating will face further downward pressure unless the government is able to successfully navigate the current situation such that a clearly visible and easily achievable path to stabilizing debt metrics is established within the next 12-18 months, in which case the outlook could be revised to stable. The rating could also be downgraded if pressures on the currency peg mount significantly.

RATINGS RATIONALE

The principal methodology used in this rating was Sovereign Bond Methodology published in September 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, 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 has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, and public information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Bart Oosterveld
MD - Sovereign Risk
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

Aaron Freedman
Vice President - Senior Analyst
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

Moody's downgrades Barbados to Ba1; outlook negative
No Related Data.

 

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