S&P maintains BBB- rating for Montserrat, yet Barbados languishes?
On Sept. 30, 2013, Standard & Poor’s Ratings Services affirmed its ‘BBB-/A-3‘ sovereign issuer credit ratings on Montserrat noting that the outlook remains stable.
“Our ‘BBB-‘ transfer and convertibility assessment is unchanged,” the report notes. “The ratings on Montserrat reflect the U.K.’s institutional and budgetary support of the island, which is an internally self-governing overseas territory of the U.K. The U.K., through the Department for International Development (DFID), and the EU contribute roughly half of GDP in grants for budget support and infrastructure investment.”
“A 2012 memorandum of understanding also affirmed U.K. support for the island’s long-term development goals. Following volcanic eruptions in the mid- to late-1990s, Montserrat’s population has more than halved to 5,000 people, and the southern two-thirds of the Caribbean island has been closed to habitation and to most business activity. Montserrat residents remain vulnerable to hurricanes, earthquakes, and volcanic eruptions – the Soufriere Hills volcano remains active at a low level.
“Today, the island’s narrow economy, with per capita income of US$12,500, is concentrated on small-scale tourism and volcanic sand and bottled water exports. It remains highly dependent on foreign transfers for government services and foreign exchange. Access to the island is hindered by the lack of a breakwater and port at the future town centre and by limited air service. These factors have contributed to Montserrat’s less than 1% annual real per capita economic growth since 2007.
“Montserrat has a low net general government debt burden of 4% of GDP and a low interest burden of less than 1% of government revenues thanks to U.K. and EU grant support. We expect that external grants of nearly 87% of current account receipts (CAR) (or just over 50% of GDP) that Montserrat will receive in 2013, plus net foreign direct investment, portfolio equity investment, and other external borrowing totalling 9%, 1%, and 16% of CAR, respectively, will cover the island’s external financing needs. Montserrat’s external financing needs total upwards of 150% of CAR and usable reserves. As the development of the port and town centre progresses over the next few years, we expect imports of construction materials and capital goods will raise Montserrat’s external financing gap. The island’s indigenous banks remain net external creditors.
“However, they could reverse this position in favour of domestic lending if private-sector investment opportunities materialize around the port and new town centre on the island. Like many Caribbean peers, Montserrat does not publish an international investment position, which contributes to material inconsistencies of external data.
“As a member of the Eastern Caribbean Currency Union, Montserrat lacks monetary policy flexibility. The monetary union’s quasi-currency board arrangement pegged to the U.S. dollar engenders low and stable inflation.