S&P: Grenada’s finances remain acute

ST GEORGE’S—Grenada has managed to boost international investor confidence by making its overdue coupon payment on its US$193 million bond due 2025 before the expiry of the 30-day grace period the country was given when it missed the scheduled September 15 payment. On October 12, the government of Grenada sent funds to its paying agent that were sufficient to pay holders of its bond in full for the interest owed to them since the missed payment.

 

This payment came a few days after the government castigated Wall Street-based credit ratings agency Standard & Poor’s Ratings Services (S&P) for publicly stating on the international markets that it considered Grenada to be in default on its debt obligation and lowering the island’s foreign currency sovereign credit ratings to ‘SD’ (selective default) from ‘B-/B’. However, in light of the payment, S&P made an about turn and upgraded Grenada’s status, although not to previous levels.

 

This Tuesday (October 16) the S&P raised its foreign currency sovereign credit ratings on Grenada to ‘CCC+/C’ from ‘SD/SD’. The agency also affirmed its ‘CCC+/C’ local currency ratings on Grenada. The senior unsecured foreign currency rating on the 2025 bond is also ‘CCC+’. The outlook on the long-term ratings is negative. S&P explained: “The large and persistent fiscal and external deficits, debt management difficulties as a result of weak liquidity, and dim near-term growth prospects limit our ratings on Grenada. The government’s access to the Caribbean Regional Government Securities Market, as well as funding and aid from multilateral and government sources, support the ratings.”

 

“This, in our opinion, cured the default on the foreign currency debt. The payment was made within the 30-day grace period indicated in the issue documentation, but we view a missed payment as a default if it is not paid within five days of the due date, according to our criteria,” S&P said.

 

However, the S&P cautioned: “In our opinion, the liquidity pressures on the government of Grenada’s overall finances remain acute. We project economic growth of less than one per cent in 2012, as foreign direct investment remains low and the tourism industry continues to struggle (for example, a large hotel announced this week that it will close).”

 

The New York agency also cited several policy areas that it considered inimical to the country’s economic fortunes, including the continuation of several tax exemptions that have contributed to lower-than-budgeted revenues; and plans to reduce planned capital expenditure drastically for the second half of 2012 and likely into 2013, which will be accompanied by lower foreign grants and multi-lateral loan disbursements.

 

The S&P noted that although the government has remained current on its local currency obligations and was able to issue EC$12 million (US$4 million) of Treasury bills on the Caribbean Regional Government Securities Market last week, liquidity pressures have caused the government to delay public-sector wage payments twice in recent months.

 

The ratings agency also reflected on the fact that Grenada’s external imbalances are also high. S&P noted that the nation’s large structural current account deficits (greater than 20 per cent of GDP) contribute to large external financing needs (more than 200 per cent of current account receipts and usable reserves). Grenada has a large net external liability position of about 750 per cent of GDP. Gross external debt is approximately 100 per cent of GDP.

 

The S&P said its negative outlook reflected the potential for a downgrade if liquidity pressures remain acute and funding options become more limited over the next 12 months. (Caribbean360)