By Mildred Moss, Contributor MOST OF you will agree that the current global environment is extremely hostile to the developing countries of Central America and the Caribbean - especially those countries that are geographically small and have narrowly based economies that make them more susceptible to external shocks than other countries. In periods of heightened uncertainty, the outlook for the region as a whole is cautious. However, investors may minimize their exposure by pooling sovereign credits of different ratings with investment grade credits - such as those offered by Barbados - that have a BBB rating or higher. Higher credit quality is commensurate with lower yields, as these countries are perceived to be more resilient to external shocks. Barbados has the highest credit rating (Baa2/A-) in the region, with about 50% of its external debt held by institutional investors in the US. Its rating signifies a relatively stable, low risk country in the context of emerging market bonds, and is an indicator that Barbados has a strong capacity to meet its debt obligations even in the face of adverse global conditions. The country's rating is influenced by such factors as the following: Politics Barbados has a stable, democratic political process. The governing Barbados Labour Party, under the stewardship of Prime Minister Owen Arthur, has a 26:2 parliamentary majority and is expected to retain control in the upcoming elections, due to be called no later than January 2004. The Government - which is presently mapping out a 30-year development plan that includes tax and pension reform - utilizes a systematic and inclusive approach to structural development that is viewed favourably by the rating agencies. Tourism In 2002, the sector contributed about 15% of GDP and 70% of current account receipts. Two-thirds of tourist arrivals are from the USA and Europe. As the main engine of growth, it is not surprising that the global recession and the aftermath of 9/11 slowed Barbados growth and prompted a 2-year recession. However, by the second half of 2002 the sector showed some signs of recovery, with tourist arrivals up by 7.9% when compared to the previous year. This positive trend has continued through to the first two months of 2003. Also of credit to Barbados is the fact that the country is virtually crime free and, as such, is valued at a premium considering the turbulent environment. Services This sector accounts for 74% of GDP and is expected to continue growing in the coming years. While the advent of trade liberalisation has placed Barbados' sugar and agro business sectors at a distinct disadvantage to large-scale manufacturers worldwide, Barbados has the requisite infrastructure for a relatively smooth transition to a service economy. The country already enjoys a high standard of living that ranks Barbados 1st among developing countries, and its educational standard is also very high. Furthermore the services sector complements the tourism sector in so far as it runs the gamut of value added service industries - from high-end tourism to international business activities. Although Barbados seems to be emerging from a recession, real GDP growth is still within the negative territory of -0.6% for the Financial year 2002/3. Growth prospects for 3.5% of GDP are overshadowed by global events; however, Barbados can improve its performance by taking stock of the factors within its control. Such factors include: Fiscal Policy The fiscal deficit stood at 5.3% of GDP in Financial Year 2002/3 or more than double the desired 2.5% of GDP - a target that was achieved consistently between 1995 and 2001. It is important to remember that high fiscal deficits must be financed either by raising taxes or further borrowing, and these are both measures that could prove destabilising for a country with little headroom. Barbados' fiscal imbalance seems manageable, at least for the near-term, but could prove unsustainable over longer periods. It is worthy of note that, by being very transparent about the process, the Government has averted any negative reaction to the deteriorating deficit. Public Debt Lower growth rates and higher debt stock that totalled US$1.98 billion in 2002 have meant an increase in debt ratios. Debt to GDP grew from 45.5% in 1998 to 72.8% - high relative to most countries in a similar rating category. Plans are underway to reduce the ratio to 60% by the end of 2003, in line with international standards. Barbados has two outstanding US$ denominated Eurobond issues, broken down as follows:
The good news is that, despite the increase in debt stock, interest payments actually declined owing to lower interest rates. Ninety-day Treasury Bill rates are below 1% in BD$ that has been pegged at BD$2:US$1 since 1975; long-term rates on government paper are less than 6%. Interest payments on the debt, at 12.8% of current budgetary revenues, are relatively low by international standards. As a precautionary measure the Government does not intend to raise additional funds on the international capital market, at least for the near-term. Outlook Barbados has been solid performer to date and is one of a few sovereigns registering positive returns on their bonds since the start of the year. However, given the global context of higher oil prices, prolonged war and US recession, Barbados remains challenged to develop industries that propel growth and generate adequate foreign exchange to service its debt. Prepared by Mildred Moss, Chief Operating Officer at Sterling Asset Management Ltd. Send feedback to sterlingasset@jamweb.net