Standard & Poor's said yesterday that it has revised its outlook on Barbados to stable from negative.
The world's top credit rating agency also affirmed its 'BBB+' long-term foreign, 'A-' long-term local, and 'A-2' short-term currency sovereign credit ratings on Barbados. Its credit analyst Richard Francis said the change in outlook reflects a fiscal adjustment that is currently underway.
The fiscal change is expected to lead to a small surplus of 0.2 per cent of GDP in the 2007 calendar year, up from a deficit of 0.9 per cent (including the large surpluses of the National Insurance Scheme) in 2006, as capital spending - much of which is associated with the preparation for the Cricket World Cup 2007 - tapers off.
Lower government debt
This improvement is expected to lead to gradually lower net general government debt, falling to 37 per cent of gross domestic product (GDP) in 2007 from 40 per cent in 2005, and a gradual fall in the interest burden of over 11 per cent, versus the 'BBB' median's five per cent. Furthermore, buoyant growth prospects for 2007, the result of a pick-up in tourism combined with lower capital expenditure, should lead to an improving current account position (to an average five per cent of GDP during 2008-2009 and six per cent in 2007, down from 11 per cent in 2006) and lowering external vulnerabilities that have built up over the past three years.
Mr. Francis explained that the ratings on Barbados balance still-high external pressures and limited fiscal flexibility with political stability and strong governance within both the public and private sectors. "The government has played a central role in shifting the economic focus from manufacturing and agriculture toward services and recently took important steps to reform the pension system, improve the tourism infrastructure, and liberalise telecommunications," Mr. Francis said. "A key challenge for the country will be to increase tourism prospects and to diversify into new service sectors to generate solid economic growth after 2007," he added.
Standard & Poor's said that the stable outlook reflects the expectation that the public sector debt burden will continue to decline over the medium term as economic growth remains buoyant and the government slowly tightens public spending. It also anticipates that the current account deficit will ease moderately over the medium term, particularly if equity inflows ebb.
"The outlook could be revised back to negative if the government fails to rein in its fiscal deficit, leading to a concomitant rise in public indebtedness," Mr. Francis noted. "Persistent high current account deficits going forward could also place downward pressure on the ratings, particularly if offsetting equity inflows decline or pressure emerges on the fixed-exchange-rate regime, which underpins Barbados's good inflation performance. It is important to provide an ample cushion of both fiscal and external flexibility to withstand the possible external shocks inherent to a small island nation," he concluded.
