What is Barbados' creditworthiness?

Wilberne Persaud, Financial Gleaner Columnist

Words like 'junk', 'downgrade' and 'poor outlook' adorned major Barbados newspaper headlines this week.

Actually, the international ratings agency, Standard & Poor's (S&P), downgraded Barbados' sovereign debt.

In its overview, S&P opines: "The economic fundamentals of Barbados continue to weaken, reflecting not only the external environment but also more pronounced competitiveness and other structural shortcomings; we believe that the fiscal stance remains weak, as seen in the rising debt burden, off-budget spending, and outstanding contingent liabilities. As a result, we have lowered our sovereign credit ratings on Barbados to 'BB+/B' from 'BBB-/A-3'. We have also assigned a recovery rating of '3' to Barbados's foreign-currency debt, which reflects our assessment of meaningful recovery (50 per cent to 70 per cent) in the event of a sovereign default. The stable outlook reflects our view that at this lower rating, the sovereign has some room to absorb possible mild fiscal deterioration and weak economic growth in the near term without affecting its creditworthiness."

We chose the word 'opines' advisedly. Why? Because that's what it is - an opinion.

People normally seek a second opinion when diagnosed with cancer, or wish to have at least two oncologists look at and interpret their biopsy results.

Indeed, one might wish to have even more opinions when it comes to indicated treatment. Never mind what some in our field may think, or what level of robustness they may place on this or that econometric result, economics is neither physics nor mathematics, and it certainly is not merely double-entry bookkeeping or accounting.

Many are the young engineers and mathematicians whose experience as 'Quants' on Wall Street prior to the 2008 meltdown shall confirm this.

Indeed, S&P for its part insists everyone should know the following about their ratings:

• Credit ratings are opinions about relative credit risk.

• Credit ratings are not investment advice, or buy, hold, or sell recommendations. They are just one factor investors may consider in making investment decisions.

• Credit ratings are not indications of the market liquidity of a debt security or its price in the secondary market.

• Credit ratings are not guarantees of credit quality or of future credit risk.

After these caveats, perhaps you're wondering what use this is - ratings surrounded by all that gobbledygook.

The fact that ratings are opinions is the reason we may debate them as well as changes to pre-existing ratings for that matter. In this vein, DeLisle Worrell, governor of the Barbados Central Bank, says S&P neither knows nor understands the realities of the Barbadian economy.

The Nation newspaper quotes him as saying the downgrade is 'unjustified', lacking in 'logic'.

"I am satisfied the downgrade represents a lack of understanding of the Barbadian reality and that is the point we are making, and we are on the attack rather than on the defence," said the central bank governor.

Minister of Finance Sinckler insists the economy is well managed. Against this are calls by the opposition party - not by any stretch of imagination as colourful as 'Star Boy' K.D. Knight's call for former PM Golding to go - but nevertheless emphatic that the governor should go and that elections be called.

Now we get it! This is not merely a letter grade or passing a test. Does the governor stand to lose his job? Or does government lose their hold on the reins of power? This is fundamental stuff, not some mathematically derived formula at all. So what are the relative merits of the varying positions indicated?

First, let's consider negatives for S&P. Simon English, writing in London's Evening Standard of July 10, 2012 posits that "serious investors no longer believe the ratings".

He quotes David Jacob, former head [fired last December] of structured finance at S&P, saying the ratings are there "because people have to have them, not because people believe in them ... maybe retail investors do, that's the unfortunate part, but I think institutional investors don't."

This is all true, the agencies behaved badly during the run-up to the meltdown. They rated CDOs and other junk as triple 'A' and benefited from such unwarranted investment-grade ratings.

So S&P is running on a tarnished reputation. But that does not mean much to Barbados. Should there be the need to approach the international market, the cost of borrowing shall be higher.

David Jacob is correct, people have to have them - small fish in the international finance sea still must seek shelter even if the reef is under stress - yet it is a bit of a hit to the collective ego.

As to the foreign-exchange risk it assesses and seemingly signals, with respect to confidence, there is as yet no discernible evidence of this as a risk factor.

A Jamaican would have to be 40 years old at least, to remember an exchange rate of US$1 to J$5. Barbadians know only US$1 to BDS$2. Indeed, it is a matter of common agreement that any government that presides over devaluation shall be booted out.

So although there is an exchange control regime, the taxi driver and hotel worker paid in US dollars perceive no premium value.

Today's Barbados is like late 1960s Montego Bay, in which US and Jamaican dollars could circulate without a thought to the conversion factor.

But there is something, changed in the past decade and a half that seems to occupy the minds of many Barbadians. It is the fact that a significant part of the economy is now controlled by Trinidadian corporate capital.

It is not possible to miss the unspoken, if perhaps unwarranted apprehension: that without local control of significant aspects of the economy, decisions shall and do lack both the feel and reality of 'patriotism'.

Yes, the country faces problems - one in particular, the CLICO meltdown with its deleterious impact on so many in the population, that have been too long on the slow-cooking back burner.

These problems , however, not insurmountable. S&P's scenario of a "recovery rating of '3' to Barbados's foreign-currency debt, which reflects [its] assessment of meaningful recovery (50 per cent to 70 per cent) in the event of a sovereign default" seems to me a bit peculiar.

Upon what is this level of apparent precision based? We are told neither of the set of assumptions nor the model that produces these results.

Could it be simply 'back-o-the-envelope' arithmetic, or better yet good guess, good bet, like a dicey derivative?

Wilberne Persaud is author of 'Jamaica Meltdown: Indigenous Financial Sector Crash 1996'. Email: wilbe65@yahoo.com