Standard & Poor’s unimpressed with Barbados’ finances

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.

Agreement with IMF essential for Jamaica, Moody’s says

Verbatim from rating agency Moody’s on Jamaica, highlighting mine:

The IMF, which has been negotiating the terms of a $1.2 billion stand-by facility with Jamaica for several months, said on Friday after fund officials spent several days in Kingston, that discussions would continue in Washington next week. The focus, said the IMF, is “on how to reduce the large fiscal deficit and put the debt on a clear downward path.” There was no clarification with respect to the timing for finalizing the discussions.

A delay in reaching an agreement with the IMF could have potentially adverse credit consequences given Jamaica’s continued fiscal underperformance. An agreement with the IMF is crucial to provide essential multilateral funding to strengthen Jamaica’s external position, shore up confidence and meet financing obligations.

A sizeable fiscal adjustment required to stabilize debt dynamics is presenting a major challenge to the government as the majority of expenditures are devoted to wages – which have already been frozen – and interest payments while revenues are declining amid depressed economic activity. This year’s fiscal deficit is projected at 8.7% of GDP and public debt is expected to reach some 120% of GDP.

The government has repeatedly expressed its commitment to service its obligations in both local and foreign currency and has a long track record of timely debt service even during difficult times. However, Jamaica’s limited resources relative to the size of the public debt raise the possibility of a debt restructuring in order to place the government financial position on a sustainable path.

Jamaica’s B2 rating, among the lowest assigned by Moody’s to a sovereign nation, already reflects significant concerns about the government’s ability to honor obligations given its limited policy options to deal with the effects of the on-going economic downturn. High levels of public debt and vulnerability to interest and exchange rate movements limit the country’s flexibility in meeting these challenges.

Another blow for Jamaica from S&P

Hot on the heels of the decision by Standard & Poor’s to slash Jamaica’s sovereign rating comes this announcement from the rating agency:

S&P: National Commercial Bank Jamaica Counterparty Credit Rating Lowered To ‘CCC’; Survivability Assessment Lowered To ‘B’

* On Nov. 2, 2009, we lowered the long-term sovereign rating on Jamaica to ‘CCC’ from ‘CCC+’.
* We are lowering our ratings on NCB, including the long-term counterparty credit rating, to ‘CCC’ from ‘CCC+’. We are also lowering our survivability assessment on NCB to ‘B’ from ‘B+’.
* The outlook on NCB remains negative, mirroring that on Jamaica, as a result of the bank’s concentration in government debt securities and loans to public entities in the country.

MEXICO CITY Nov. 4, 2009–Standard & Poor’s Ratings Services said today that it lowered its ratings on National Commercial Bank Jamaica Ltd. (NCB), including the long-term counterparty credit rating, to ‘CCC’ from ‘CCC+’. At the same time, we lowered our survivability assessment on NCB to ‘B’ from ‘B+’, as assigned on Aug. 6, 2009. The outlook is negative.

[In rating agency speak, the survivability assessment is “a current opinion on the likelihood that over the medium-term, a bank will either directly or through a successor organization, remain in operation, regardless of whether it is solvent or insolvent, paying all of its obligations on a timely basis or not.”

Moreover: “A relatively low survivability assessment does not constitute an opinion by Standard & Poor’s that a particular bank is likely to fail; rather it indicates a vulnerability to adverse circumstances which could affect the bank’s ability to meet its financial obligations on a timely basis, without special circumstances which would clearly enhance the likelihood that it would continue to operate in such an event. ”

And here’s what S&P means by a “B” rating in this area: “A bank with a survivability assessment of ‘B’ is VULNERABLE. Adverse business, financial or economic conditions will likely impair the bank’s ability to maintain operations in which case the bank may become subject to regulatory intervention.”]

The rating action followed the downgrade of the long-term sovereign credit rating on Jamaica (CCC/Negative/C) to ‘CCC’ from ‘CCC+’.

“NCB has a very large exposure to Jamaican sovereign-debt securities and loans to public entities,” said Standard & Poor’s credit analyst Alfredo Calvo. “Also, Jamaica’s deteriorating economic situation and the more-challenging conditions for the Jamaican banking system will continue to pressure the financial performance of the bank.”

The action on the survivability assessment was based on the downgrade of NCB and our view that vulnerabilities in the government’s debt profile have grown significantly from previous years, narrowing the government’s capacity to support the bank in times of stress.

However, we are still maintaining our survivability assessment at three notches higher than the counterparty credit rating on NCB. This reflects our continuing expectation that the government could give certain assistance to the bank if needed because of NCB’s significant market share in the country, adequate financial performance, and large branch network and deposit base.

If the liquidity and market share of the bank shrink significantly, we could further adjust our survivability assessment.

The ratings on NCB are limited by the bank’s large exposure to Jamaica’s government; greater loan concentration than peers; operation within a relatively small and nondiversified economy with high debt; and the more challenging environment for the Jamaican banking system.

However, the bank’s leading market presence in the Jamaican banking system, adequate but pressured performance under more-challenging conditions, and consistent improvements in its operating performance support the rating.