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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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Business & Finance

S&P downgrades Barbados

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More bad news for Caribbean economies – rating agency Standard & Poor’s on Wednesday downgraded the foreign currency rating of Barbados to BBB from BBB+.

From the S&P statement, highlighting mine:

Barbados Foreign Currency Credit Rating Lowered To ‘BBB’ From ‘BBB+’; Outlook Stable

— The global economic crisis has pressured Barbados’ economic and fiscal performance and had a negative spillover effect on its sovereign debt trends.

— We are lowering our long-term foreign currency sovereign credit rating on Barbados to ‘BBB’ from ‘BBB+’.

— We expect the combination of prudent policymaking and strong, cohesive social policies will help Barbados through difficult economic times ahead, in line with its ‘BBB’ rated peers.

NEW YORK, June 10, 2009–Standard & Poor’s Ratings Services said today that it lowered its long-term foreign currency sovereign credit rating on Barbados to ‘BBB’ from ‘BBB+’. At the same time, we lowered our long-term local currency rating on Barbados to ‘BBB+’ from ‘A-‘, and the foreign currency short-term rating to ‘A-3’ from ‘A-2’, while the local currency short-term rating was affirmed at ‘A-2’. Our transfer and convertibility assessment was revised downward to ‘BBB+’ from ‘A-‘. The outlook is stable.

“As the global economic crisis spills over onto Barbados’ economic and fiscal future performance trends, the sovereign’s debt ratios, which already lag behind those of its ‘BBB+’ rated peers, will further diverge from the ‘BBB+’ median over the next few years, putting the country’s fundamentals and prospects more in line with ‘BBB’ rated sovereigns,” said Standard & Poor’s credit analyst Olga Kalinina.

We expect Barbados’ economy to contract by 2.5% in 2009, followed by a flat performance in 2010, before gradually recovering to a 2.5% growth in 2011. In the meantime, the government fiscal policy is countercyclical, resulting in the projected increase in debt levels to 86% of GDP (on a gross level) and 46% (on a net level) in 2009. Importantly, with lower revenues, servicing of the debt is becoming more expensive, as interest payments are expected to rise to 12% of revenues this year from 9% in 2007–the highest level among the rating peers.

The stable outlook reflects our expectation that the government’s limited policy choices, especially in light of the peg on the Barbadian dollar and the country’s already high debt levels, coupled with its commitment to address the debt situation, will result in the government tightening its fiscal accounts from 2010 onward. We believe this will lead to stabilization in the government’s debt levels. The strength of the country’s institutional and social arrangements, and its well-funded Social Security scheme (which provides significant fiscal deficit financing) afford Barbados the credit support and stability necessary for the current rating level.

On the external front, 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. While the build-up in the government’s external sinking fund alleviates its short-term, external-debt servicing needs, the ratings could come under downward pressure if reserve losses were to come in higher than projected and strain the country’s already weak external liquidity ratios. Also of concern is the drop in the international reserves’ coverage of the monetary base to 83% in 2008 from 102% in 2007; this is expected to fall further to 74% in 2009.

“Our future ratings actions will take into account the magnitude of any deterioration in the country’s economic and fiscal metrics, including those related to the resolution of CLICO Holdings (Barbados) Ltd.’s issue, as well as the level of public support for the government’s necessary fiscal consolidation measures over the next year and beyond,” added Ms. Kalinina.


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Business & Finance, Trinidad & Tobago

Moody’s reviews First Citizens’ ratings

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Moody’s, the ratings agency, is reviewing the credit ratings of First Citizens Bank Limited for a possible downgrade. The agency has been conducting a broad review of global banks, so this is not entirely surprising.

Here are the comments from Moody’s, any highlighting is my own:

New York, June 02, 2009 — Moody’s Investors Service has placed the A1 long term local currency deposit rating of First Citizens Bank Limited on review for possible downgrade in light of its global review of systemic support for bank ratings in the context of the current credit crisis. As a result, Moody’s also placed on review for possible downgrade the A1 ratings for the foreign currency debt of First Citizens Bank (St Lucia) that is guaranteed by First Citizens. The bank’s C- bank financial strength rating, Prime-1 short term local currency deposit rating, and Baa1/Prime-2 foreign currency deposit ratings are not affected by this review and have been affirmed.

Government-owned First Citizens is the only bank rated by Moody’s in Trinidad and Tobago and as such is the only bank affected by the reassessment of systemic support. At present the bank’s local currency deposit and foreign currency debt ratings incorporate three notches of systemic support. “The review of First Citizens’ debt and deposit ratings will consider the extent to which the government of Trinidad and Tobago’s ability to support its banking system, should such support be needed, is converging with the government’s own debt capacity as a result of the ongoing global economic and credit crisis,” says Jeanne Del Casino, a Moody’s Vice President and Senior Credit Officer.

The rating agency believes that most governments are at least as likely, if not more likely, to support their banking systems as they are to service their own debt — a view that has traditionally led to bank ratings often benefiting from significant uplift due to systemic support. However, as the financial crisis continues, the capacity of a country and its central bank to support the nation’s banks converges with, and is constrained by, the government’s own debt capacity.

Moody’s has previously used the local currency deposit ceiling (LCDC) as the main input for its assessment of the ability of a national government to support its banks. Although anchoring the probability of support at the LCDC is appropriate in many circumstances — regarding the provision of liquidity to a selected number of institutions over a short period of time — this might overestimate the capacity of a central bank to support financial institutions in the event that a banking crisis may become both truly systemic and protracted.

The rating agency will review the specific circumstances of Trinidad and Tobago to determine the appropriate systemic support for Trinidadian bank ratings. Moody’s will reassess the level of systemic support for First Citizens to determine to what extent the systemic support incorporated in its ratings should be more closely aligned to the government’s local currency bond rating of Baa1. This approach is outlined in Moody’s special comment “Financial Crisis More Closely Aligns Bank Credit Risk and Government Ratings in Non-Aaa Countries” available on www.moodys.com.

Factors that the rating agency will consider in its assessment of systemic support include (i) the size of the banking system in relation to government resources, (ii) the level of stress in the banking system, (iii) the foreign currency obligations of the banking system relative to the government’s own foreign exchange resources, and (iv) changes to the government’s political patterns and priorities.

Moody’s noted that the size of Trinidad and Tobago’s banking system is modest relative to the government’s resources. Credit stress in the banking system has been muted so far during the current financial crisis, though banking fundamentals are experiencing some pressure in light of the economic slowdown in Trinidad and Tobago. Government actions during past crises are indicative of the Trinidadian government’s high focus on financial system stability. During Trinidad’s financial crisis of the early 1990s, the government acted purposefully to contain the potential contagion effects of troubled institutions in the market. More recently, in February 2009, the government took control of three local financial institutions owned by CL Financial Limited, the country’s largest conglomerate, to help stem funding pressures at that company.

In affirming First Citizens’ C- bank financial strength rating Moody’s said that the bank continues to exhibit sound profitability, liquidity, and capital adequacy which position it well to cope with potential asset quality deterioration in the context of the economic downturn. Moody’s noted that the ratings review is unlikely to lead to more than a one notch change in First Citizens’ foreign currency debt and local currency deposit ratings. The rating agency expects to conclude the review over the next few weeks.


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