NEW YORK, CMC -The United States-based Moody’s Investors Service (Moody’s) Friday upgraded the Barbados government issuer ratings to B3 from Caa1 while maintaining the island’s stable outlook
It said the key drivers behind the rating decision were the pre and post-pandemic fiscal consolidation that, coupled with a robust economic recovery, led to a declining debt burden; the implementation of durable structural reforms will support achieving higher fiscal primary surpluses as well as reduced government liquidity risk coupled with adequate foreign exchange buffer support Barbados’ credit profile.
The US rating agency said Barbados’ local currency country ceiling had been moved up in line with the sovereign rating and is now set at Ba3, while the foreign currency country ceiling was raised to B2 from B3.
“The three-notch gap between the sovereign rating and the local currency ceiling reflects low government intervention in the economy, strong rule of law, consistent macroeconomic policies, and low political risk. The two-notch gap between the foreign-currency and local currency cement incorporates relatively high external vulnerability and capital controls on foreign exchange movement.”
Moody’s said that before the pandemic, Barbados made significant progress toward addressing the root causes that led to the sovereign default in 2018.
“However, the severe pandemic-related economic contraction slowed down further reductions in debt burden. Over the past two years, as economic activity recovered and fiscal consolidation efforts resumed, the debt burden fell last year and returned to its downward trajectory.”
Moody’s said in its assessment the improvement in growth dynamics and fiscal performance, as well as the reduction in the debt burden, will be sustained over the coming years.
According to Moody’s, Barbados’ gross domestic product (GDP) growth it reached 10 percent in 2022, following a 13.5 percent contraction in 2020-21.
Moody’s said it expects real GDP growth close to five percent this year and 3.9 percent in 2024, which will further reduce the debt-to-GDP ratio.
“Over the medium-term, real GDP growth will likely moderate around 2-3 percent, but higher than the pre-pandemic performance, supported by public and private investment in climate-resilient infrastructure, renewable energy, and construction in the tourism sector. Improved growth performance will support fiscal consolidation and put the debt burden on a firm downward trajectory.”
Moody’s said it expects a gradually increasing primary surplus will ensure the government debt ratio is firmly placed on a downward trend.
The rating agency said the government achieved a primary surplus of 2.5 percent of GDP in 2022, compared to a deficit of one percent recorded in 2020 and 2021.
“The improved fiscal performance resulted from higher revenue and reduced COVID-related expenditure. Moody’s expects that the fiscal accounts will continue to improve, reporting a primary surplus of 3.5 percent of GDP this year, in line with the government’s reform .program.”
It is predicted that the island’s fiscal performance will reduce the debt burden to 94 percent of GDP this year, down from 100 percent last year, with further declines expected in the coming years.
Moody’s said that the Mia Mottley government is progressing in advancing the structural reform agenda, focusing on public financial management and enhancing revenue collection, pension reform, and continuing state-owned enterprises (SOE) reform to reduce government transfers to public sector entities further.
These efforts will likely enable the government to reach its target of a primary fiscal surplus of four percent of GDP by the financial year 2024/25, reinforcing the downward trajectory of the debt burden.
In its rationale for the stable outlook, Moody’s said it reflects a balance between elevated credit risks related to still-high debt and interest burdens against the rating agency’s expectation of a firm downward trajectory for debt metrics over the coming years.
“Barbados ESG Credit Impact Score (CIS-3) reflects highly negative exposure to environmental risks related to climate change and social risks related to aging populations, which is mitigated by efforts to improve climate resilience and strong governance.”
It said Barbados’s economy is exposed to environmental risks due to the impact of weather-related shocks, which are expected to increase in severity due to climate change. “Exposure to physical climate risk and high water stress negatively impacts performance in the tourism sector, a key industry for the island. Barbados’ exposure is somewhat mitigated through ongoing efforts to improve resilience to shocks, transition to renewable energy sources, and support from development partners.”
Moody’s said Barbados is also exposed to social risks due to negative demographic trends, balanced against the adequate provision of essential services, a welfare state, and relatively strong education outcomes. Social pressure may arise if economic growth remains subdued post-pandemic, leading to weaker fiscal consolidation.
“Strong institutions and governance support Barbados’s credit profile, balanced against a recent history of default, leading to a moderately negative exposure to governance risk,” the US rating agency added.
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