Sovereign ratings agency Standard & Poor’s (S&P) has downgraded its outlook on the Barbados economy from “stable” to “negative”¹.

The announcement comes just over a year into the Democratic Labour Party administration led by Prime Minister David Thompson.

Debt and an uncertain Barbados to US dollar peg

In explaining the ratings agency’s decision, S&P analyst Olga Kalinina cited the island’s growing fiscal deficits and the consequent increase in the government debt burden, which she says does not bode well for Barbados’ long-standing commitment to maintain the currency peg.

The Barbados dollar has been pegged to the US dollar at 2:1 since 1975.

Bleaker outlook for 2009 as debt reaches 44% of GDP

S&P expects a bleaker outlook for the remainder of 2009 as real GDP contracts by 2.1% this year, compared to a modest growth of 0.5% in 2008.

Meanwhile, central government’s deficit will reach 5.7% of GDP, and net general government debt will increase to 44% of GDP this year.

The analyst also warns that although the current account deficit will shrink to 6% of GDP in 2009 (down from 11% in 2008, a decline mainly attributable to savings from oil imports), Barbados’ low foreign direct investment and financial account inflows are expected to put pressure on Central Bank reserves.

In this regard, the financing gap is expected to climb to 169% of current account receipts and useable reserves, and the gap is expected to hold at more than 165% for the next three years. The financing gap last stood at 143% in 2007.

Government’s inconsistencies, CLICO and further reserve depletions do not rule out another downgrade – and further pressures on currency peg

Standard & Poor’s stresses that the negative outlook on Barbados reflects the sum total of these growing imbalances, caused primarily by government’s inconsistent fiscal and monetary policy.

Citing the state’s “accommodating fiscal policy” amid the worsening economic situation, Kalinina cautions that the deterioration of the government debt dynamic will necessitate a combination of public sector borrowing, which in turn will lead to international reserve depletion. Ratings will come under further downward pressures if the loss in reserves is higher than expected, which will “intensify pressure” on the currency peg.

S&P will also consider a further downgrade if the economic deterioration puts a strain on the strength of social cohesion, or if the fiscal deterioration (including possible pressures from the CLICO issue²) is more severe than expected.

S&P’s warnings seem eerily similar to those expressed in March by former Prime Minister Owen Arthur, who described the Barbados economy today as a “perfect storm”³.

Antillean · Bridgetown, Barbados

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