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Another S&P Downgrade for Barbados and Warning of Threat to US Dollar Peg

International ratings agency Standard & Poor’s (S&P) has raised a red flag that Barbados’ longstanding 2-to-1 peg to the US dollar is under threat as economic conditions continue to deteriorate.

In a grim report issued yesterday, S&P also warned that the Freundel Stuart administration was unlikely to balance its budget any time soon, given lingering challenges including poor implementation of policy decisions, the likely overestimation of one-off revenues, and approaching general elections.

Against this backdrop, S&P lowered the island’s long-term local currency sovereign credit rating to ‘CCC’ from ‘CCC+’, while affirming its long-term foreign currency sovereign rating at ‘CCC+’. The outlook on both long-term ratings is negative.

A major bugbear cited by the New York-based agency is the island’s high fiscal deficit. The deficit is estimated at six per cent, and overall debt at about 140 per cent of gross domestic product (GDP), which S&P said was one of the highest in Latin America and the Caribbean.

“Barbados’ policy challenges include high general Government debt, deficits, and debt servicing requirements; limited appetite for private-sector financing; and a low level of international reserves raising the risk to sustainability of the peg to the US dollar,” S&P said in its report.

“In our opinion, monetary financing to the central Government is at odds with sustaining Barbados’ currency peg to the dollar, and it significantly curtails the Central Bank’s ability to act as a lender of last resort in the financial system. Low inflation is a reflection of global conditions rather than effective monetary policy execution given the fixed exchange-rate regime,” it added.

The ratings agency warned that should Government fail to advance measures to significantly lower its high fiscal deficit, strengthen its external liquidity, and reverse its low level of international reserves, there could be further pressure on availability of deficit financing, albeit from official or private creditors.

S&P further stressed that this situation was also posing challenges to the fixed exchange rate regime, while at the same time pointing out that economic growth was being held back by recurrent tourism project delays, higher taxes, low private sector confidence and consumption, and a significant level of red tape, which weakens Barbados’ overall economic profile.

However, while predicting further downgrade, the ratings agency left room for an improved rating, should the administration achieve certain targets.

“We could revise the outlook to stable over the next 12 months if the Government succeeds in balancing its fiscal budget, either from implementation of fiscal measures or a prolonged rebound in growth; improves its access to financing from private creditors locally and globally; and stabilizes the country’s external vulnerabilities and bolsters international reserves,” the report said.

The latest downgrade has drawn strong reaction from several quarters.

Opposition Leader Mia Mottley expressed dismay that the island had been downgraded for the 20th time in nine years and the country was now virtually on par with Venezuela.

She said the S&P downgrade and negative outlook were likely to further erode investor confidence and warned that the country would not improve under the Democratic Labour Party administration.

“How many more downgrades will it take for the Prime Minister and his Government to realize that there is no confidence left in their ability to reverse the situation?”

“Barbadians are paying too high a price for this Government’s incompetence and stubbornness,” Mottley charged.

At the same time, President of the Barbados Chamber of Commerce and Industry (BCCI) Eddy Abed said the private sector was extremely concerned about the situation facing the country and he feared it would not improve anytime soon, given that the next general election is due within months.

“There is nothing positive about this rating that any of the citizens and businessmen in this country can say that we have something to look forward to.

“Government has been reluctant in approaching the IMF [International Monetary Fund]. Sadly, we are paying the price for it because our foreign reserves are extremely woeful and the prospects going forward don’t seem at all to be positive, so much so the ratings agency has said that the expectations are negative,” he lamented

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