Barbados’ credit rating has been cut by Standard & Poors Ratings Services (S&P).

Stating that the Caribbean nation has gone back into recession, S&P changed the island’s rating to ‘BB-’ from ‘BB+’, but S&P affirmed the country’s short-term rating at ‘B’. The rating outlook is negative.

S&P stated in a press release announcing the downgrade: “Barbados faces mounting external pressures associated with a widening current account deficit, external financing challenges, and a high fiscal deficit, largely because of a decline in government revenues as a result of the weak economy.

“We expect Barbados’ net general government debt burden to rise to above 70 percent of GDP in fiscal 2013 from 67 percent in fiscal 2012 and 60 percent in fiscal 2011 as a result of large fiscal deficits.”

In lowering their long-term rating, S&P stated: “The negative outlook indicates a better than one-in-three chance of a downgrade if investment and growth prospects fail to strengthen and external and fiscal pressures continue to complicate financing.”

The ratings services agency continued: “The downgrade reflects the mounting external pressures associated with a persistent current account deficit and external financing challenges, as well as the ongoing high fiscal deficit, largely because of a substantial fall in government revenues as a result of the weak economy. The twin deficits have strained the country’s international reserves. They have fallen significantly over the past six months to below the monetary base, reserve coverage of which we generally view as important in supporting a pegged currency.

“On a gross basis, the international reserves cover nearly two months of current account payments, down from more than three months as of year-end 2012.

“As a result of the large fiscal deficits, we expect the net general government debt burden to rise to above 70 percent of GDP in fiscal 2013 ending March 2014, from 67 percent in fiscal 2012 and 60 percent in fiscal 2011. Barbados uses more than 13 percent of general government revenues to pay interest on its debt, excluding the interest that the government pays on debt held by the National Insurance Scheme (NIS).”

S&P said Barbados’ economic fundamentals continue to weaken, reflecting competitiveness and other structural shortcomings, and added: “ ... as well as an only slowly recovering global economy.

“Results for the first nine months of 2013 show that Barbados has fallen back into recession after a very weak recovery in 2010 to 2012, and real GDP per capita has declined on average. We expect real GDP per capita to decline by about 0.9 percent in 2013 but to rise in 2014 and move above one percent in 2015 thanks to tourism and construction (in both the private and public sectors). With a slow recovery, unemployment will likely remain high, after reaching 11.6 percent in 2012.”

S&P also said: “Including NIS surpluses (estimated at 2.6 percent of GDP in 2012), the general government deficit rose to 5.4 percent of GDP in fiscal 2012 from 1.8 percent in fiscal 2011. We expect the deficit to edge up to 5.8 percent in 2013, as a result of the recession, before gradually falling over the next three years. However, there are risks because of the sluggish outlook for the country’s main economic sectors, its high unemployment, and both the need to reduce deficits and potential spending pressures.

“The country has a stable, predictable, and mature political system, which benefits from consensus on major economic and social issues, including support from the private sector and trade unions for the government’s ongoing fiscal and structural adjustment programme.

“The negative outlook reflects the potential for a downgrade over the next year if investment and growth prospects fail to strengthen and external and fiscal pressures continue to complicate financing. We could revise the outlook to stable if the government is able to adopt measures that significantly reduce fiscal deficits, leading to declining debt and interest burdens, which would lower external pressures as well.”