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Standard & Poor’s unimpressed with Barbados’ finances

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Rating agency Standard & Poor’s continued its focus on the Caribbean with a note on Barbados’ public finances. Below in full, highlighting mine:

Barbados Outlook Revised To Negative On Deteriorating Public Finances; ‘BBB’ And ‘A-3’ Foreign Currency Ratings Affirmed

— We believe the timeliness and magnitude of Barbados’ fiscal consolidation is uncertain because of a worse-than-anticipated economic recession.

— We’re revising the outlook on Barbados to negative from stable.

— We’re affirming the ‘BBB’ long-term and ‘A-3’ short-term foreign currency sovereign credit ratings.

— The negative outlook reflects the possibility of a downgrade if the authorities fail to consolidate the general government deficit (estimated at 7.1% of GDP in 2009) and to curb the rising debt. We forecast net government debt at 52% of GDP this year, up from 42% just three years ago.

NEW YORK, Nov. 13, 2009–Standard & Poor’s Ratings Services said today that it revised its outlook on Barbados to negative from stable. At the same time, we affirmed the ‘BBB’ long-term foreign and ‘BBB+’ long-term local sovereign credit ratings. The short-term ratings remain at ‘A-3’ for foreign currency and ‘A-2’ for local currency. The transfer and convertibility assessment for Barbados is ‘BBB+’.

“The outlook revision on Barbados to negative is due to our view that the timeliness and magnitude of the government’s fiscal consolidation, necessary to preserve Barbados’ credit fundamentals at the current ‘BBB’ level, is uncertain because of a worse-than-anticipated economic recession in the country,” said Standard & Poor’s credit analyst Olga Kalinina. Results for the first three quarters of 2009 underscore a rapid deterioration in Barbados’ public finances, at a faster rate than we had previously assumed, and a sharper economic contraction. We have revised Barbados’ real GDP estimate to negative 4.8% in 2009 (from our previous estimate of negative 2.5%), with a further decline of 1% expected in 2010, before a return to growth in 2011.

Also, we have made a significant revision to our expectations for the government’s fiscal deficits, both for 2009 (based on three quarters of 2009 data) and for the last three years (based on new information on the off-budget activities). We now expect the general government deficit at 7.1% of GDP in fiscal 2009 (ending March 31, 2010), up from 5.6% last year, 6% in 2007, and 3.8% in 2006. This encompasses the central government deficit of 9.1% of GDP (including 0.5% of off-budget deficit) and the National Insurance Scheme (NIS) surplus of 2%.

Our projections incorporate an assumption of a gradual reduction in the fiscal deficits starting in 2010, although the debt is likely to peak in 2010 at 55% of GDP (on a net basis), before starting to decline in 2011. We note that there is support across the political spectrum, private sector, and unions for fiscal tightening and that the government is preparing a medium-term framework to address the situation. The risk to our projections, however, is the timeliness and efficiency of the anticipated measures amid a slowing economy and rising unemployment.

The negative outlook reflects the possibility of a downgrade if the authorities fail to contain fiscal deficit widening this year and reduce fiscal deficits starting in 2010. Conversely, rapid consolidation of public finances, most probably accompanied by a return of foreign investment, would restore strength to Barbados’ balance sheet and support the stable outlook. We will closely watch the trends in Barbados’ international reserve levels in order to identify any potential stress on its external liquidity position and currency peg.


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Business & Finance

“Jamaica may already have passed the point of no return”

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Usain Bolt, by Richard Giles, via flickr/tagaroo

Just one month after rating agency Standard & Poor’s released a downbeat assessment of the outlook for Jamaica comes an equally – if not more – negative take from Barclays Capital Research.

The research note issued today by a New York-based BarCap analyst is unequivocal:

we believe that Jamaica is approaching the point of no return and that it will take more than fiscal adjustments to regain sustainability for the long term. For 2009, we expect interest payments to be 16.0pts of GDP, or more than 60% of revenues. Fiscal sustainability in Jamaica has been under pressure for the past ten years, but we believe that at this time, the IMF is more willing to help Jamaica restructure its debt than to prolong its agony.

Elsewhere in the note, which also examined El Salvador, Panama, Costa Rica, the Dominican Republic and Guatemala, the analyst is even less sanguine about Jamaica’s financial prospects:

Of particular concern, Jamaica’s fiscal deficit could reach around 20% of GDP (with more than 15% of GDP in interest payments). We think it is extremely unlikely that any reform program will be able to put the country on a sustainable medium- to longer-term fiscal path and believe that the IMF is weighing whether it would be costlier to allow (and maybe help) the country to restructure its debt or to give the Jamaican government the USD1.2bn that is soliciting in order to postpone its agony.

Unfortunately, we believe that Jamaica may have already passed the point of no return and that for the IMF, as well as for the country in the long term, it would be more convenient to assist in a restructuring of debt.

As the three tables below – also from the note – illustrate, Jamaica is in dire straits both in absolute terms and as compared with other countries in Central America and the Caribbean:

BarCap
BarCap

Reduction in current acount deficits (historic and projected)External public debt (historical and projected)


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Business & Finance

S&P’s move on Jamaica suggests there’s pain ahead

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This is bad. S&P had previously assigned a rating of B- to Jamaica. In financial parlance, a B- rating sovereign rating suggests that the country is perceived as “high risk” by would-be lenders; in a word, “junk”.

By downgrading Jamaica to triple-C, S&P is saying the island is ” currently vulnerable and dependent on favorable economic conditions to meet its commitments.”

In other words, if economic conditions in Jamaica and the Caribbean get much worse, the country is going to have a hard time meeting its outstanding debts.

Here’s the statement from the rating agency:

Jamaica Downgraded To ‘CCC+’; Outlook Remains Negative

–Jamaica has a vulnerable fiscal profile and faces difficult financing conditions.

–We have lowered our long-term foreign and local currency ratings on Jamaica to ‘CCC+’ from ‘B-‘.

–The outlook remains negative, reflecting the possibility that the government may undertake a distressed debt exchange.

NEW YORK, Aug. 5, 2009–Standard & Poor’s Ratings Services said today it lowered its long-term foreign and domestic currency ratings on Jamaica to ‘CCC+’ from ‘B-‘. We kept the recovery rating at ‘4’. We also lowered the T&C assessment to ‘B’ from ‘B+’. The outlook on the ratings remains negative.

“The downgrade and the negative outlook reflect our view that Jamaica’s vulnerable fiscal profile, combined with difficult financing conditions, may compel the government to undertake a debt exchange that we could regard as a distressed debt exchange,” said Standard & Poor’s credit analyst Roberto Sifon Arevalo.

Jamaica’s fiscal accounts, which were already under pressure before the international financial crisis started last September, have deteriorated even further this year. We project the government borrowing requirement for the fiscal year 2009 (ending March 31, 2010) to be 20% of GDP. The debt profile is weak. Variable-rate domestic debt constitutes 58% of total domestic debt. One-quarter of total domestic debt matures within one year. One-half of gross government debt (external plus domestic) is foreign-currency denominated or foreign-exchange indexed. As a result, general government interest is estimated at 60% of 2009 government revenue, up from 48% in 2008.

“We project that gross general government debt will rise to 120% of GDP at fiscal year-end 2009,” said Mr. Sifon Arevalo. The vulnerabilities in the government’s debt profile may give it incentives to negotiate with its creditors, particularly its resident creditors, to extend maturities at below-market prices. In the government’s last debt issue, it placed two-year debt at a 21% coupon.

“While the government’s engagement with the IMF is a positive effort to stabilize external pressures and going forward to address the long-standing structural issues,” added Mr. Sifon Arevalo, “the negative outlook on the ratings signals the risk that a debt exchange, if undertaken by the government, could be an event of selective default under our distress debt exchange criteria.”


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