Target ‘investment grade rating’

Economist Dr Ankie Scott-Joseph is warning that Barbados risks falling back into an expensive borrowing trap unless it regains an investment grade credit rating.

“For Barbados, investment grade represents more than financial credibility – it means a better future for every Barbadian,” she said after Fitch Ratings announced on Thursday it was changing Barbados’ outlook to positive and affirming the B+ rating.

The lecturer in economics at the University of the West Indies cautioned: “Without reaching investment grade, Barbados risks falling back into an expensive borrowing trap that would undo years of painful fiscal discipline and leave the country dangerously vulnerable when the next crisis hits.”

The public debt management specialist noted that “while the positive outlook signals that Fitch anticipates continued improvement, Barbados must sustain this exceptional fiscal performance for another decade without any major shocks to reach investment grade – a difficult challenge for a small island nation like Barbados, which has little room for mistakes”.

Penalty

“Currently rated B+, five to six notches below investment grade (BBB-), the country pays a steep penalty: borrowing costs are three to five percentage points higher than they should be,” she said.

“This costs Barbados millions every year – resources that could instead go toward hospitals, schools and better services for its citizens.”

The economist explained that reaching investment grade would give Barbados access to an entirely different class of lenders.

“Some institutional investors, such as pension funds, insurance companies and sovereign wealth funds, are generally restricted from holding non-investment grade bonds due to regulatory and policy constraints,” she stated. “As a result, Barbados is currently shut out from the world’s deepest and cheapest pools of capital.

“Investment grade would also send a powerful signal to tourists and foreign

businesses that Barbados is stable and trustworthy, potentially boosting visitor numbers and investment beyond today’s modest two to 2.7 per cent growth rate.”

Easier

Another economist, Jeremy Stephen, said getting back an investment grade credit rating “would make life a lot easier” for Barbados.

“It would make it easier for the Barbados Government to acquire US-denominated debt outside of Barbados, especially if we want to reinvest in productive sectors,” he noted.

“Until the day that Barbados currency is easily convertible into other currencies where we may source products from and services from extraregionally, the US dollar still remains our currency of trade, to put it frankly, our Euro dollar.

“So, as it stands, until then, we wouldn’t be easily able to acquire cheap debt to drive productive growth, and investment grade offers that ability to borrow cheaply in the international arena and on the Euro dollar market, that is, to acquire US dollars outside of the United States of America,” he added.

Fitch said factors that could individually or collectively lead to a credit rating upgrade for Barbados included “preservation of high primary surpluses that lead to a continued sharp reduction in the Government debt to GDP ratio; continued demonstration of improving access to financing sources beyond multilaterals, for example, through a deepening of the domestic debt market; and higher trend growth driven by progress on economic reforms or stronger investment”.

A credit rating downgrade could come following “a deterioration in fiscal balances that lead to material slowdown in the pace of reduction in debt-to-GDP, for instance by fiscal slippage or a growth shock [and/or] an external shock that leads to a sharp reduction in external liquidity”, Fitch explained. (SC)

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