S&P Revises Barbados’s Ratings To Negative Due To Fiscal Imbalances

by Amanda Banks, Tax-News.com, London

04 August 2005

Standard & Poor's Ratings Services has revised its outlook on Barbados's long-term foreign and local currency sovereign credit ratings to negative from stable.

S&P also affirmed its 'BBB+' long-term foreign currency, 'A-' long-term local currency, and 'A-2' short-term sovereign credit ratings on Barbados.

According to Standard & Poor's credit analyst Richard Francis, the change in outlook is a result of increasing external pressures due to high current account deficits (10% of GDP in 2004 and 2005) and rising short term external debt, which, combined with declining international reserves, have resulted in a continuing deterioration in external liquidity.

"High fiscal imbalances, increasingly incompatible with the fixed exchange-rate regime, place significant pressure on balance of payments, and leads to high and rising merchandise imports for both consumption and investment goods at the time of a secular decline in the merchandise exports," explained Mr Francis.

"The fiscal 2005-06 budget envisages an increase in capital spending ahead of the World Cricket Cup to be held in Barbados in 2007, which will likely result in a growing fiscal deficit following some improvement in the previous fiscal year," he added.

According to Mr Francis, the easing of the fiscal stance means that Barbados's net general government debt remains at about 50% in 2005, even excluding the significant holdings of general government debt by the National Insurance Scheme.

"The negative outlook reflects Barbados's weak and deteriorating liquidity position, the result of relatively high fiscal deficits in the context of its fixed exchange-rate regime. Failure to address the external imbalances through tightening of monetary and fiscal policies over the next fiscal year could lead to downward pressure on the government's creditworthiness," Mr Francis warned.

"Conversely, if the government is willing and able to reduce significantly its spending, the outlook could be revised to stable following the completion of the current ambitious capital expenditure program," he concluded.

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