Central Bank of Barbados Responds to Moody’s Rating Report
Moody’s Investors Service (Moody’s) announced its lowering of Barbados’ foreign and local currency bond ratings to Ba1 from Baa3, while maintaining a negative outlook. This action by Moody’s was not unexpected, as it brings Moody’s sovereign credit rating for Barbados in line with that of Standard and Poor’s rating revision in July 2012.
Barbados’ economic strategy remains unaffected by this action, and continues to focus on conserving foreign exchange reserves and growing the foreign exchange earning sectors. Thanks to a sufficiently tight fiscal stance, foreign exchange reserves (of BDS$1.4 billion on December 19, 2012) have been maintained at about the same level as per the end of December last year.
Government continues to finance its operations mainly from private domestic sources. For the fiscal year 2012/13, domestic financing is expected to contribute about 85% of Government financing, sourced from the NIS, non-bank financial institutions, commercial banks and the public.
Moody’s Credit Opinion acknowledges the high proportion of domestic debt in government’s portfolio; because maturing debt is usually rolled over, and there are no extraordinary peaks in the amortization profile, there is little risk that the expected domestic financing will not materialize. External debt service is only about 7 percent of the country’s earnings of foreign exchange in 2012. In addition, Government’s Medium Term Fiscal Strategy (MTFS) sets out a sustainable path via which the country’s debt can be reduced to comfortable levels by the fiscal year 2016/2017.
The current pace of fiscal consolidation under the MTFS has helped to constrain the growth in the fiscal imbalance and the level of debt. A tighter fiscal stance is possible but undesirable: it would slow the growth of debt because the financing needs would be lower, but it would also cause economic contraction and aggravate the loss of jobs. The ratio of debt to GDP might well turn out to be even higher than is currently projected.