British Virgin Islands receives ’BBB/A-2’ credit ratings, stable outlook from S&P Global

Investing.com -- S&P Global Ratings has assigned ’BBB’ long-term and ’A-2’ short-term sovereign credit ratings to the British Virgin Islands (BVI), a self-governing British Overseas Territory in the Caribbean. The agency also assigned a ’AAA’ transfer and convertibility assessment to the BVI. The outlook for these ratings is stable.

The ratings reflect the expectation that the BVI will manage its public finances prudently, offsetting some of the risks associated with its small, island-based economy. This economy is vulnerable to natural disasters and shifts in the financial services industry. The BVI’s economy is expected to see moderate growth in the tourism industry due to its position as a chartered yacht hub. The government is also expected to maintain substantial liquid assets to support its net asset position.

The stable outlook is based on expectations of institutional stability, including strong ties with the U.K., prudent fiscal policy with a strong government net asset position, and slight economic growth over the next three years.

The ratings could be lowered in the next two years if the government’s ability to deliver sustainable public finances or balanced economic growth deteriorates or if the institutional stability of the territory, including close ties with the U.K., is at risk. The ratings could also be lowered if there is a significant and persistent deterioration in income per capita, fiscal balances, or the government’s strong net asset position.

On the other hand, the ratings could be raised in the next two years if the economy grows materially above the base-case forecast and this growth is expected to persist in the medium-to-long term. The ratings could also be raised if the government significantly diversifies its revenue base or if improvements in the availability of statistical data improve the assessment of external risk.

The ratings are based on the strong institutional framework that has supported prudent fiscal management, including a strong net asset position with substantial liquid assets, and close ties with the U.K., as well as moderately high incomes. These strengths are offset by the territory’s vulnerability to external shocks, a concentrated revenue base, the lack of monetary flexibility, and limited external data.

The BVI has a wealthy, service-based economy that is vulnerable to natural disasters, external shocks, and headwinds in the global financial services sector. Despite these challenges, the government is expected to maintain a strong net asset position in the next three years, even in the face of external shocks.

The BVI’s government follows the Protocols for Effective Financial Management (PEFM) that set limits for debt, debt service, and liquid assets. Strong rule of law, reinforced by links with the U.K., as well as the U.K.’s oversight of the medium-term fiscal plan and any new public borrowing, support the assessment of the BVI’s institutional effectiveness.

The BVI’s economy is expected to witness slight real GDP growth averaging 1.5% in the next three years, driven by the tourism industry. The financial and corporate services sector is also expected to remain an important economic anchor during the forecast horizon.

Despite new commercial borrowing, the BVI is forecasted to retain a large net asset position, providing a cushion against external shocks. The government recently signed a commercial debt contract to draw down on a $100 million facility to fund key infrastructure projects. Despite this, the government’s net asset position is forecasted to remain virtually unchanged during the forecast horizon at about 46% of GDP.

The BVI’s use of the U.S. dollar and the absence of a central bank limit the monetary policy flexibility. Despite this, the adoption of the U.S. dollar has provided a stable institutional and economic anchor for the territory. Inflation is expected to remain stable over the next several years. The BVI is home to seven commercial banks, with the banking system being generally well capitalized.

The BVI’s official currency has been the U.S. dollar since it was adopted in 1959. Despite the lack of independent monetary policy to manage economic cycles, the adoption of the U.S. dollar has provided a stable institutional and economic anchor for the territory. This arrangement is not expected to change during the outlook horizon.

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