Jamaica Money Market Brokers (JMMB), in its most recent analysis on the island released last month, urged investors to “reduce their exposure and wait on the sidelines until the murky waters become clear”.
Senior Economist & Sovereign Research Manager, Jermaine Burrell, pointed to rating agency Standard & Poor’s decision to change Barbados’ outlook from negative to stable and said the threat of a downgrade was “real”.
“The government has little control over the global investment and tourism climate which. . . may face challenges due to pressures from the economic conditions facing source markets. On the fiscal side, measures have been put in place but it is our opinion that those measures will take time and their outcome is not guaranteed,” Burrell said.
“The inflow of foreign exchange is also being challenged by changes that have come due to actions by Canada. Other countries will now be able to attract investors given the new double taxation initiatives.
“Consequently, Barbados’ two major foreign exchange earners are under pressure and will likely lead to negative implications for the now fragile exchange rate peg,” he added.
The JMMB official also said while Barbados had “an impressive record of stability and making the tough decisions for sustainability”, its fiscal challenges “clearly outweigh these positives at this time”.
Burrell believed Barbados was boxed in by its heavy dependence on tourism and international business and financial services.
This problem, he noted, was exacerbated by the fact that both of these sectors were “highly dependent on global financial stability” and as a result “any major shift represents a serious threat”.
This was in addition to pressure on the Net International Reserves, which were projected to fall 14% between 2010 and this year.
And while acknowledging that government recently introduced new budgetary measures aimed at solving the island’s fiscal problems, the JMMB spokesman said the policies appeared “plausible”, but were dependent on good implementation and patience.
“The tax on banking assets has also been somewhat unpopular given that the sector is facing reduced return on equity and non-performing loans (NPL) have been climbing. NPL’s have increased to 12.9 % of total loans as at 2012. On the positive side, however, loan loss provisions remain relatively low at only 34% of total non-performing loans,” Burrell said.
All of this considered, he concluded that “the possibility of Barbados being downgraded is real”.
The analyst said too that “the fact that the sovereign has also lost its investment grade status has meant that regulation no longer allows insurance companies to hold Bajan debt”.
This suggested that “Bajan bond yields could come under upward pressure as a key support/buyer no longer has the capacity to purchase the sovereign’s debt”.