Barbados – A classic case of a ‘falling angel”

A “fallen angel” in finance is a rated entity which once carried a high credit rating (investment grade) and displayed exceptional performance, but has since experienced sustained declines in ratings culminating in the loss of its investment grade status.  Barbados’ financial woes over recent years have placed its debt in that demeaning category and future prospects for the debt also appear to be grim.

While there is no perfect way to measure wealth, one common approach is to look at a given country’s Gross Domestic Product (GDP) per capita which is at least a good indicator of the general standard of living in the country (although high concentrations of wealth in a small number of people can skew the data).   With GDP per capita of nearly US$16,000.00, Barbados is the among the top five richest countries in the Caribbean but in spite of its “wealth”, Barbados has been struggling with a mounting debt problem which has resulted in an ongoing decline in its credit profile.  Ten years ago, Barbados’s sovereign debt enjoyed the prestigious “investment grade” status by the two major rating agencies and was among the “highest quality” rated sovereign debts in the Caribbean.  However, Barbados lost its “investment grade” ranking in 2012 and since then the country’s credit ratings have been downgraded every year except for 2015. Moody’s further lowered Barbados’ already “junk” status credit rating on March 9th following a similar move by Standard & Poor (S&P) on March 3rd.  The latest ratings actions placed Barbados’ sovereign ratings at CCC+ and Caa3 by S&P and Moody’s, respectively, making Barbados among the lowest rated Sovereigns.  In fact, among the list of sovereigns currently rated by S&P (obtained from Wikipedia), only two countries are rated lower than Barbados, namely Mozambique (rated “D”) and Venezuela (rated “CCC”); while for Moody’s only Puerto Rico at “C” has a lower credit ratings that Barbados.   

Barbados’ economy, like so many other Caribbean economies, was dependent on sugarcane cultivation and related activities, but in recent years the economy diversified into light industry and tourism with about four-fifths of GDP and exports being attributed to services sector.  Additionally, an offshore financial services sector, launched in 1985, became the country’s second biggest source of foreign exchange after tourism.  
Barbados’ tourism, financial services and construction industries have been hard hit since the onset of the global economic crisis in 2008 with the economy shrinking 4.1% in 2009 and very little growth since.  Future growth prospects also appear to be limited because of weak tourism outlook and planned austerity measures to be taken by the government.  In addition, the country’s public debt-to-GDP ratio has ballooned from 56% in 2008 to 111% as at the end of 2016 and is likely to increase further.  The country’s international reserves have been halved since 2009 (in part due to the country’s insistence on protecting a pegged exchange rate to the U.S. dollar) and currently accounts for 11 weeks of imports which is below the international benchmark of 12 weeks.  The persistent decline in reserves is likely to continue to pressure the exchange rate peg. In addition, the government has been relying heavily on the Central Bank for financing as private sector funding has been dwindling, particularly from commercial banks which have been unwilling to increase their exposure to the government.   
Moody’s in its latest review assessed the likelihood of Barbados defaulting on its debt as very high in the near term as the lack of fiscal adjustment and increasingly limited financing options are likely to impair the government’s ability to service its debt.  Moody’s further stated that despite the government’s efforts to contain the fiscal deficit and alleviate pressures on foreign exchange reserves, the fiscal deficit remains large and credit risks have increased.  Furthermore, the debt burden has risen in recent years and will continue to do so for the next few.   

 In conclusion, Barbados’ debt problems continue to deteriorate and absent any significant fiscal reform and exchange rate adjustments the situation is likely to persist for a number of years to come.   Consequently, any investor contemplating an investment in Barbados’ bonds at this time should be mindful of the real prospect for some loss of principal in the near term, despite the country’s excellent track record of meeting its debt obligations.

Eugene Stanley is the VP, Fixed Income & Foreign Exchange at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback:  If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm