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Bloomberg: Barbados joins ultra-high yield club with Moody’s downgrade

Sunday, March 12, 2017

Barbados has joined the group of countries whose dollar bonds yield more than ten per cent after Moody’s Investors Service said the island nation was likely to default, according to a story on the website of financial news provider, Bloomberg.

According to the Bloomberg article, yields on the US$255 million of notes due in 2035 rose 0.35 percentage points on Thursday to 10.23 per cent, joining securities from Venezuela, Mozambique and the Republic of Congo with double-digit yields.

On Friday, local brokerage firm WISE reported that the island’s debt due in 2022 was 10.19 per cent.

On Thursday last, in downgrading the long-term bond and issuer rating of Barbados to Caa3, Moody’s said: “We assess the likelihood of a credit event in the near-term as very high, given lack of fiscal adjustment and increasingly limited financing options.”

A credit event is generally defined as “a default, bankruptcy, or other situation which is recognised as affecting the creditworthiness of a country or organisation and which may trigger insurance payments as defined in a credit default swap.”

Of the more than 60 countries tracked by the Bloomberg USD Emerging Market Sovereign Bond Index, Barbados debt is the worst performer this year, among losing 4.7 per cent while the gauge rose 2.1 per cent, Bloomberg said.

The financial news provider said the island is grappling with weak growth, one of the world’s highest debt burdens, and unwelcome currency appreciation caused by its four-decade-old peg to the US dollar. These pressures are likely to impair its ability to service its debt, Moody’s said Thursday as it downgraded the credit rating to nine levels below investment grade.

According to Bloomberg, the Moody’s downgrade follows a cut by S&P on March 3 and the February 24 firing of central bank Governor DeLisle Worrell, who had threatened to stop financing government spending. “The governor being fired would have rattled investors simply because it shows some kind of instability there at a policy-making level,” Royal Bank of Canada economist Marla Dukharan said in a Bloomberg interview.

“The governor had started to come out about how bad it really is.”

The 2-to-1 peg with the US dollar is starting to show cracks, and an all-out balance of payments crisis is a possibility, Dukharan said.

Central government debt was above 110 per cent of GDP at the end of last year and international reserves fell to $341 million, the lowest level since 2009, Moody’s said.

Sinckler is proposing a budget that forecasts a deficit of 4.4 per cent of GDP for the fiscal year beginning in April. The US$4.5 billion economy is likely to expand by 1.7 per cent this year, according to the IMF. The economy is about the same size now as it was a decade ago, following years of weak growth and contraction.

With only about US$56 million in interest payments due, the nation of 290,000 people is unlikely to default on international debt this year, said Andrew Stanners, an investment manager at Aberdeen Asset Management. Instead, the government will continue to rely on the central bank to print money, adding to levels of domestic debt, he said.

“The risks are mounting,” said Stanners, who manages about $10 billion in emerging market debt. “They probably can muddle through to 2018.”


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