New York, July 02, 2019 -- Moody's Investors Service ("Moody's") has today
upgraded Barbados' foreign and local currency issuer ratings to
Caa1 from Caa3, affirmed the foreign currency senior unsecured bond
rating at Caa3, and maintained the stable outlook.
The rating actions reflect the following considerations:
(1) The material improvement in Barbados' fiscal and debt metrics,
and reduced susceptibility to event risk, following the restructuring
of its local currency debt
(2) The expectation that the improving policy framework and on-going
fiscal and structural adjustment will place government debt on a downward
trajectory
(3) Alongside the unresolved external debt restructuring which supports
maintaining the Caa3 rating on outstanding foreign currency bonds
The stable outlook balances our expectations of continued improvement
in the government's fiscal performance and debt metrics against
the risk of policy slippage and implementation challenges, facing
the structural reform agenda.
The long-term foreign currency bond ceiling is changed to B2,
while the short-term foreign currency bond ceiling is unchanged
at NP. The long-term foreign currency deposit ceiling is
changed to Caa2, while the short-term foreign currency deposit
ceiling remains at NP. The long-term local currency bond
and deposit ceilings are changed to B1.
RATINGS RATIONALE
RATIONALE FOR THE UPGRADE OF ISSUER RATINGS TO Caa1
With the completion of Barbados' local currency debt restructuring
(representing 80% of the government's debt stock),
and expectation of a resolution in due course of its privately-held
foreign currency debt restructuring (representing a further 12%
of outstanding debt), the country's capacity to service its
restructured and potential future debt obligations has materially improved.
The decision to upgrade Barbados' foreign and local currency issuer
ratings to Caa1 signals the improved debt service capacity now and in
relation to future issuances. The decision to maintain a Caa3 foreign
currency senior unsecured rating signals the losses that private sector
holders of outstanding foreign currency bonds can expect. The gap
between foreign currency issuer and senior unsecured ratings signals Moody's
view that while it is extremely unlikely that the government will choose
to issue into the international markets in the near future, were
it do so the debt issued would carry a lower risk than the instruments
currently subject to restructuring negotiations.
FIRST DRIVER: MATERIAL IMPROVEMENT IN BARBADOS FISCAL AND DEBT METRICS,
AND REDUCED SUSCEPTIBILITY TO EVENT RISK
In November 2018, the government of Barbados completed the restructuring
of its stock of local currency debt, and reached agreement with
the IMF on a four-year, $290 million Extended Fund
Facility (EFF). As a result, Moody's estimates that
the stock of government debt fell to 90% of GDP from 101%
the year before (excluding debt held by the National Insurance Scheme)
-- a material cut, though still to a very high level of indebtedness.
The debt restructuring has also resulted in a significant cut in the interest
burden on the government's budget. Moody's estimates
that the government's interest payments more than halved,
to 13% of revenue in 2018 from 27% in 2017.
In addition, government liquidity risk has significantly improved,
reducing Barbados' susceptibility to event risk. The government's
financing needs and overall liquidity risks have diminished following
the debt restructuring, which has significantly extended the maturity
structure of the debt stock. Several years of large fiscal deficits
and central bank monetarization of the deficits increased Barbados gross
borrowing requirements to nearly 50% of GDP in June 2018,
with the majority of maturing principal in short-term paper.
Following the debt restructuring, nearly the entire T-bill
stock was written down or converted into long-term instruments.
At the same time, medium- and long-term instruments
had their maturities significantly extended, further reducing rollover
risk over the rating horizon. As a result, Barbados'
gross borrowing needs are likely to remain very low, at no higher
than 5% of GDP, over the next five years.
SECOND DRIVER: IMPROVING POLICY FRAMEWORK AND ON-GOING FISCAL
AND STRUCTURAL ADJUSTMENT WILL PLACE DEBT BURDEN ON A DOWNWARD TRAJECTORY
The government of Barbados has embarked on an ambitious structural reform
program, supported by the IMF, which will contribute to improving
Barbados' macroeconomic framework and policy effectiveness.
Combined with the debt relief, structural reforms will help correct
the sovereign's fiscal imbalances and put the country's debt
burden on a downward trajectory over the next three to four years.
Key to improving fiscal management in Barbados is the stronger oversight
and accountability framework for SOE finances and limiting central bank
financing to the government. The government now requires SOEs to
report their finances on a quarterly basis, and approval of a new
central bank law is expect in 2020 as a structural benchmark of the EFF
program. In addition, the government is planning a new fiscal
rule, which will aim to restrict the magnitude of fiscal deficits
the government is able to run and to limit the increase in public debt.
This recent turnaround in economic and fiscal policies will contribute
to reducing public debt to reach the government's target of 60%
of GDP by 2033. The EFF also calls for an increase in the primary
surplus to 6.0% of GDP in FY2019, up from 3.4%
of GDP in fiscal 2018. The government has implemented a number
of revenue enhancing and expenditure measures to reach its primary surplus
target.
RATIONALE FOR THE AFFIRMATION OF FOREIGN CURRENCY BOND RATING AT Caa3
THIRD DRIVER: UNRESOLVED EXTERNAL DEBT RESTRUCTURING SUPPORTS MAINTAINING
Caa3 RATING ON OUTSTANDING FOREIGN CURRENCY BONDS
While the government has swiftly been able to reach an agreement on restructuring
its local currency debt with domestic creditors, negotiations with
external commercial creditors to restructure the stock of foreign currency
debt (bonds and commercial loans) have taken longer. In June 2018,
the government stopped servicing commercially held foreign currency debt
and has been in negotiations with external creditors over the past year.
The government made a number of offers to external creditors, along
the lines of the exchange offer accepted by domestic creditors and negotiations
are still ongoing. While Moody's expects these negotiations
to be protracted, it believes that losses to external commercial
creditors will ultimately prove to be similar to those incurred by domestic
creditors, consistent with the Caa3 rating assigned to outstanding
foreign currency bonds.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook focuses on the underlying factors supporting the credit
rating of Barbados -- rather than specific debt instruments.
It therefore balances our expectations of continued improvement in the
government's fiscal performance and debt metrics against the risk
of policy slippage and implementation challenges, facing the structural
reform agenda. Moody's expects the government will maintain
its effort to achieve the fiscal targets and structural reform goals of
its IMF-supported program. However, there is also
a risk of reform fatigue, after several years of fiscal austerity.
A weak growth environment, with GDP growth unlikely to exceed 1%
by 2020, will also increase the burden of fiscal consolidation through
next year.
WHAT COULD CHANGE THE RATING-UP
The very high level of indebtedness remains a key constraint on the rating.
Further upward pressure on issuer ratings would likely only materialize
as a result of actions which provided assurance that the debt burden would
continue to fall over the coming years. In that regard, successful
implementation of the government's ambitious fiscal and structural
adjustment offering the prospect of higher medium-term economic
growth and improved competitiveness would be helpful, alongside
successful implementation and application of the planned fiscal rule.
Completion of the foreign currency debt restructuring would likely lead
to the foreign currency senior unsecured debt rating moving to the same
level as the foreign currency issuer rating.
WHAT COULD CHANGE THE RATING-DOWN
The rating would come under renewed downward pressure if, the government
were to fail to maintain its fiscal adjustment efforts, leading
to renewed fiscal deficits and buildup of government debt, which
will also renew pressure on the currency peg and increase external vulnerability.
GDP per capita (PPP basis, US$): 18,534 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -0.5% (2018
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0% (2018
Actual)
Gen. Gov. Financial Balance/GDP: -0.3%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.5% (2018 Actual)
(also known as External Balance)
External debt/GDP: 43.9%
Level of economic development: Moderate level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 27 June 2019, 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 fiscal or financial strength,
including its debt profile, has materially increased. The
issuer has become less susceptible to event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. 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: 1 212 553 0376
Client Service: 1 212 553 1653
Yves Lemay
MD - Sovereign Risk
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
