Central Bank of Barbados Comments on Moody’s Rating – Confidence in meeting all Fiscal Obligations of Barbados despite hurdles remain intact

BIBA says; "Moody's said the downgrade considers the agency's view that the primary credit strength that historically has enabled Barbados to achieve a higher rating than the country's foreign currency obligations, namely the existence of a large captive market for domestic currency government paper, has eroded." {FILE IMAGE - Dr DeLisle Worrell, Central Bank Governor}

On Monday June 13, 2011, Moody’s Investors Service downgraded the Government of Barbados’ rating on its domestic debt to Baa3 from Baa2. The rating agency reaffirmed the Baa3 foreign currency debt rating – resulting in both Barbados’ foreign and domestic debt bearing the same Baa3 rating and keeping the country in the investment grade category.

The outlook on both ratings has been revised to negative, indicating that these ratings could be lowered in the next 12 to 18 months. Moody’s cited its increasing concern about the capacity of the domestic market to continue to absorb the elevated issuance of Government debt, while at the same time the country’s already large current account deficit is expected to increase further due to the recent rise in oil prices. In addition, the rating agency’s view is based on the likelihood of a further deterioration in the Government’s debt ratios, over the next year to year and a half.

While the Central Bank agrees that increasing financing pressure has been placed on the local financial market, given the level of liquidity in the market and the continued strong demand of institutional investors for domestic Government securities, the Bank remains confident that the local market can accommodate the current and projected levels of Government debt issuance. Moreover, the amortization profile for Government’s domestic debt portfolio is relatively smooth, with maturities mostly at the longer end of the maturity spectrum, which aids in ensuring that the domestic debt-service burden is not too onerous.

Furthermore, based on Government’s continued commitment to consolidate its fiscal position, which should be reflected in a lowering of the debt burden in 2012, the volume of net new financing from domestic entities is also expected to decline in the medium term, as reflected in Government’s Medium Term Fiscal Strategy. The sustainability of Government’s efforts at fiscal consolidation will be conditioned by the gradual economic recovery that has already begun to take shape, coupled with gains from the revenue measures cited in the November 2010 Estimates and Budgetary Proposals. It is supported by an effective coordinated mechanism for monitoring the fiscal performance, which allows for the application of timely corrective measures. This is consistent with the proactive way in which Barbados has approached the recent economic challenges.

In spite of rising oil prices, there remains no doubt about Government’s ability to repay its foreign debt obligations, given that international reserves are currently in excess of 20 weeks of imports.

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