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Fiscal Worries Hit Barbados's Rating

by Phillip Morton, Investors

08 November 2010

The Central Bank of Barbados said it was “disappointed" with a decision to downgrade the jurisdiction's debt, which has been attributed to delays in fiscal consolidation efforts, a slower than expected economic recovery and an expected increase in debt over the next two years.

On October 22, ratings agency Standard and Poor’s lowered the territory's debt rating to BBB-, although the country's debt has maintained investment grade status and its outlook is 'stable.' In response, the Central Bank said:

”The government’s commitment to fiscal consolidation remains strong, and a highly effective coordinated mechanism for monitoring the fiscal performance and applying timely corrective measures is in place. As mentioned in the S&P report, in order to offset the revenue loss of close to 8% between January and August 2010, the government kept control over wages, goods and services spending, and reduced outlays on capital by more than 40% compared with the first eight months of 2009. The outcome of these efforts is a fiscal deficit that was a full percentage point of GDP lower than was attained in the same period during 2009.”

”The S&P report assumes that no measures will be taken on the revenue side until the start of the next fiscal year, even though the government has announced that it will be presenting a budget in a few weeks. Also, in his recent Press Conference, the Governor reiterated the government’s commitment to achieving the targets of the Medium Term Fiscal Strategy, in spite of the weaker than expected revenue, and noted that the options being considered were further spending cuts or increased taxation.”

"On the issue of debt, the government remains well positioned to service its obligations. Roughly 70% of the debt portfolio is in local currency and mostly at the longer end of the maturity spectrum, with a smooth amortization profile. Moreover, any increase in debt warranted by the fiscal position, can be fully accommodated by the local financial system from available liquidity. On the external side, international investors remain confident in the Barbadian economy as indicated by the oversubscription of the recently floated USD200m bond.”

”Finally, historically Barbados has a demonstrated capacity to take timely corrective actions during difficult economic times, as the S&P report admits."

TAGS: tax | investment | fiscal policy | international financial centres (IFC) | budget | offshore | Barbados

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