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Moody's downgrades St Vincent & Grenadines

Published:Thursday | October 11, 2012 | 12:00 AM
Dr Ralph Gonsalves, prime minister of St Vincent and the Grenadines. - File

The United States-based rating agency, Moody's Investors Service, has downgraded St Vincent and the Grenadines to B2 from B1.

It said the decision was a result of poor growth prospects following a protracted recession and weak recovery in tourism, and a significant and rapid deterioration of the government's balance sheet.

Moody's also blamed elevated vulnerability to external economic shocks for the decision to downgrade the island from its stable outlook.

According to Moody's, the economy has contracted for four consecutive years and it expects growth to recover to a modest 1.5 to 2 per cent in 2012/13.

"St Vincent's small, concentrated economic base - the US$700 million economy relies heavily on tourism and construction activity funded by foreign investment - and a weak US recovery that has adversely affected tourism across the Caribbean, will continue to dampen potential growth.

"Prospects for future growth depend critically on improving the competitiveness of the tourism sector and the completion of a new airport, which is subject to considerable uncertainty and expected to strain government finances," Moody's said in a statement.

Deteriorating financial balance

It said the public sector plays an outsized role in the economy. Government spending is critical to generating employment, maintaining social entitlement programmes, and funding infrastructure investment.

"St Vincent's downgrade to B2 incorporates a marked deterioration of the government's financial balance over the past five years, driven by elevated government spending on capital projects, primarily related to the construction of a new airport, and high current expenditure on public sector wages, social security transfers, and other benefits," the agency said.

"Revenue growth has been limited by low growth and depressed tourism and banana export sectors, despite a broader tax base following reforms that included the introduction of value-added and excise taxes in the mid-2000s," it added.

Moody's said that the central government's debt-to-GDP (Gross Domestic Product) ratio has deteriorated to 62 per cent in 2012 from 41.5 per cent in 2007, while debt metrics compare unfavourably with B-rated peers.

"We expect the government will find it difficult to rationalise spending and achieve the fiscal consolidation necessary to stabilise the debt and place it on a sustainable trajectory in the near term," said the rating agency.

Moody's added, "The government relies primarily on grants and concessional financing from bilateral and multilateral sources, including several emergency credit facilities from the IMF (International Monetary Fund). It has also increasingly leveraged short-term debt issued on the ECCU's (Eastern Caribbean Currency Union) regional government securities market, which reflects a lack of access to global markets and may elevate rollover risk."