Barbados- The Writing Was On The Wall

It was a little over a year ago on Sunday March 12, 2017 that a colleague of mine, Eugene Stanley, wrote an article titled, “Barbados – A classic case of a falling angel”. The writing was on the wall from then and here we are today. In a surprisingly aggressive start to her career as Prime Minister of Barbados, Mia Mottley and the country’s new government have announced an “emergency plan” to tackle its mounting economic crisis. They are suspending payments and will seek a full restructuring of the country’s debt (both domestic and external). This is a surprising move as the general consensus among market participants was that the new government would only pursue a local restructuring since their local bonds constitute approximately 70% of the total debt; and leave their global bonds untouched.

Barbados’ suspension of debt payments triggered another downgrade. The Caribbean Information and Credit Rating Services Limited (CariCRIS), placed Barbados on a "rating watch", as it listed the island's level of creditworthiness as "poor" compared to its regional neighbours. In addition, the external bonds have been downgraded by S&P to SD (selective default) and the local debt to CC from CCC+.

Quoting from my colleague’s article: 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.

In fact, it turns out that things were grimmer than anyone realized. In a statement released on Friday June 1, 2018, the country’s finance ministry said that after a review of the government’s finances it had discovered “substantial arrears that were not previously included in headline public debt figures”, which lifted Barbados’ debt-to-GDP ratio to over 175 per cent. FX reserves are said to have shrunk to US$220 million (an import cover of seven weeks, significantly below the international benchmark of twelve weeks) which is their lowest level in more than two decades and the government has US$100 million of foreign debt service payments to be made by July.

It has long been felt that a devaluation of the Barbados Dollar could help solve their fiscal woes, however it appears that the government and the major Social Partnership stakeholders would like to protect the fixed exchange rate first and foremost, hence a full restructuring is being sought in order to maintain the 2:1 fixed exchange rate with the USD.

Aside from restructuring, a number of reforms including civil service job cuts, wage freezes and possible pension reform will be targeted at "internal devaluation" which the Government expects will negate the need for a "nominal devaluation".

Barbados has contracted White Oak Advisors to assist in the process and an IMF team is in Barbados for a three-day visit, led by Bert Van Selm to help the government formulate the programme. 

My coworker, in his March 2017 article, had warned that any investor contemplating an investment in Barbados’ bonds at that 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. It’s not that he had a crystal ball, it’s just that the writing was on the wall.

In spite of the negative news there are still buyers for these bonds in the market and so investors who hold this bond can either liquidate their position (do your analysis to see if you are liquidating at a loss) or watch and see what the restructuring offers.

Toni-Ann Elliott (formerly Neita) is the AVP, Personal Financial Planning 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