Political Will Essential To Averting Debt Crisis

BMI View: While we do not see a crisis as imminent, Barbados' deteriorating fiscal picture and weak growth outlook are sending its international borrowing costs sharply higher and leading to an increasing reliance on short-maturity, domestic debt issuance that poses a higher degree of rollover risk. The government is likely to encounter significant political opposition to recently-passed fiscal austerity measures, and we believe the political will to maintain the reforms will be essential to avoiding a debt crisis over the coming months.

Barbados' fiscal picture is under pressure from a weak growth outlook and rising borrowing costs, and while we do not believe a debt or fiscal crisis is imminent, we highlight growing risks. Provided Barbados maintains the political will to pursue its current fiscal austerity agenda, we believe the country will be able to avoid having to restructure its debt burden.

Spending And Revenue Mismatch Getting Worse

Weak Growth Exacerbating Fiscal Shortfall
Barbados - Current Revenue & Expenditure, BBDmn (12-Month Rolling)

BMI View: While we do not see a crisis as imminent, Barbados' deteriorating fiscal picture and weak growth outlook are sending its international borrowing costs sharply higher and leading to an increasing reliance on short-maturity, domestic debt issuance that poses a higher degree of rollover risk. The government is likely to encounter significant political opposition to recently-passed fiscal austerity measures, and we believe the political will to maintain the reforms will be essential to avoiding a debt crisis over the coming months.

Barbados' fiscal picture is under pressure from a weak growth outlook and rising borrowing costs, and while we do not believe a debt or fiscal crisis is imminent, we highlight growing risks. Provided Barbados maintains the political will to pursue its current fiscal austerity agenda, we believe the country will be able to avoid having to restructure its debt burden.

Spending And Revenue Mismatch Getting Worse

Expenditures have not grown substantially in recent years, but revenues have never fully recovered after the 2008-2009 global financial crisis. For the last several years, this mismatch between revenue and expenditure was facilitated by moderate nominal GDP growth and low international borrowing costs. However, real GDP growth flat-lined in 2012, and we forecast real GDP contractions of 0.5% and 0.4% in 2013 and 2014, respectively, due to weakness in the export sector, falling tourist arrivals, and a decline in the offshore financial sector. As a result, revenues have fallen dramatically over the past year. Further complicating matters is a rise in global yields, as the US Federal Reserve signals that it is preparing to normalise its monetary policy on the back of a strengthening US economy.

Weak Growth Exacerbating Fiscal Shortfall
Barbados - Current Revenue & Expenditure, BBDmn (12-Month Rolling)

These two factors have led to a spike in the yield on Barbados' external debt, which has jumped from 7.7% in October to 9.3% at one point December 18. This jump in yield played a large part in the government's decision in late October to cancel an external debt offering.

Yield Spike Signalling Distress
Barbados - US$ Global 2022 Government Bond Yield, %

The rising cost of borrowing internationally has prompted Barbados to issue a greater proportion of its new debt in the local market. While external debt as a percentage of GDP has actually fallen in recent months, from 31.4% in December 2012 to 29.5% by October, domestic debt has jumped from 56.0% to 64.9% over the same period. While domestic debt is often preferable from the sovereign's point of view, as policymakers can pursue a weaker currency to reduce the cost of servicing debt, especially the government has foreign currency-denominated revenues, Barbados is not in this position, as both major political parties have expressed strong support for the existing currency peg to the US dollar. Additionally, we believe it is possible that the surge in domestic debt in the past year has had the effect of crowding out the private sector, diverting funds from the relatively shallow domestic capital market.

Greater Reliance On The Local Market
Barbados - External & Domestic Debt, % of GDP

Troublingly, the government is concentrating its new debt issuance at the short-end, meaning that it could face considerable rollover risk if domestic borrowing costs rise in the relatively shallow domestic debt market. Again, while we do not believe a crisis is imminent, Barbados appears to be running out of room to manoeuvre.

Shifting Toward Shorter Maturities
Barbados - Domestic Debt By Maturity, BBDmn

Political Will Critical To Averting Crisis

The Barbadian parliament has passed a set of strict austerity policies, but maintaining commitment to these policies in the face of domestic opposition will be key ( see 'Political Risk To Fiscal Reform Growing', November 1), and we expect that this will only intensify. The government has recently announced that it is cutting 3,000 public sector jobs (17.7% of the public sector workforce) and imposing pay cuts on other workers, a move that we believe will compound criticism from the opposition Barbados Labour Party and increase pressure on the ruling Democratic Labour Party (DLP) to soften the fiscal consolidation drive. The reaction of the National Union of Public Workers, which represents the public sector employees, will be key to determining the strength of the political backlash. While there is no parliamentary election until 2018, the DLP has only a narrow 16-14 seat majority, so it can ill afford defections on high-priority issues like the reform package.

Risks To Outlook

In the event that fiscal conditions deteriorate further, we believe Barbados is relatively well positioned to seek international assistance to close its budget shortfall. Indeed, it has already accepted technical advisors from the IMF to find ways to reduce outlays and increase the efficiency of tax collection, and the fiscal reform drive that the government has already implemented has taken many of the steps upon which IMF aid would likely be contingent. However, given the recent precedents set by other Caribbean countries (Belize, Grenada, and Jamaica all initiated debt restructuring talks in 2013), we cannot rule out a credit event should political opposition to further austerity lead to major policy reversals.

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Sector: Country Risk
Geography: Barbados, Barbados
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