Barbados’ credit rating improves to B2, Moody’s maintains stable outlook

Investing.com -- Moody’s Ratings has elevated the long-term issuer ratings of the Barbados government from B3 to B2, keeping a stable outlook. The upgrade is a testament to Barbados’ ongoing fiscal consolidation, characterized by enduring primary surpluses and a shrinking fiscal deficit that solidly reduces the debt.

The government of Barbados has introduced institutional and structural reforms that enhance the effectiveness of fiscal policy, reducing the chance of fiscal slippage even amid external shocks. These changes reflect positively on the strength of institutions and governance. The improved fiscal stance and continuous access to concessional external funding from multilateral creditors diminish the government’s liquidity risk and dependence on external market funding.

The upgrade is also influenced by Moody’s anticipation of a higher real GDP growth compared to the pre-pandemic performance. This growth is supported by structural reforms and increased investment in key sectors, including climate resilience efforts, despite risks associated with the global slowdown.

The stable outlook is based on the belief that previous reform efforts have fortified Barbados’ economic resilience, enhancing the country’s capacity to absorb shocks. The ongoing execution of the Barbados Economic Recovery and Transformation (BERT) plan and the government’s commitment to fiscal prudence underpin expectations for a steady reduction in government debt.

Moreover, Barbados’ external position has strengthened, as evidenced by a sufficient foreign exchange buffer, which supports its ability to respond to external shocks. Despite its economy’s dependence on tourism and susceptibility to external shocks, the Barbados government is expected to uphold prudent fiscal policies in line with its medium-term fiscal framework.

The local currency bond ceiling of Barbados has been increased to Ba2 from Ba3, and the foreign currency bond ceiling has been elevated to B1 from B2. The three-notch gap between the sovereign rating and the local currency ceiling reflects consistent macroeconomic policies and low political risk, balanced against limited economic diversification and susceptibility to shocks.

The two-notch gap between the foreign-currency ceiling and the local currency ceiling incorporates still relatively high external vulnerability, persistent current account deficits, and capital controls on foreign exchange movement.

Barbados has shown a strong commitment to fiscal and structural reforms that set government debt on a firm downward trajectory. The fiscal deficit narrowed to 1.6% of GDP in 2024, compared with an average of 4.6% of GDP between 2015 and 2018, prior to the debt restructuring.

The government’s fiscal consolidation efforts have resulted in large primary surpluses of around 4% of GDP as the economy recovered from the pandemic shock. These efforts, along with tax reform and a strong economic recovery, drive Moody’s expectation that the debt-to-GDP ratio will decrease to around 80% in 2025, down from 89% in 2023. Over the medium-term, Moody’s expects Barbados debt to decline to 67% by 2030 due to sustained fiscal surpluses and solid real GDP growth.

The government’s fiscal efforts focus on reducing the debt burden to 60% of GDP by 2035. Reforms to improve fiscal policy implementation and the institutional framework will solidify gains in fiscal policy effectiveness and ensure policy continuity in the coming years.

Barbados’ improved fiscal position, combined with access to financing from multilateral development banks and gradually improving domestic financing options, have significantly improved its financing flexibility. The government has also demonstrated improved access to market funding, securing a sustainability-linked loan in December 2024 to repurchase a portion of its outstanding domestic bonds, achieving fiscal savings that will be used to fund critical infrastructure investment in a sewage treatment plant.

Barbados’ economy has shown resilience to shocks and GDP growth has strengthened, supported by durable structural reforms and investment in both tourism and non-tourism sectors. Despite the economic effects of Hurricane Beryl, real GDP growth in 2024 remained strong at about 4% and the tourism sector displayed strong growth dynamics.

While global macroeconomic uncertainty presents a downside risk to growth and investment in 2025, Moody’s expects investment in tourism, infrastructure and energy transition in the next two to three years will continue to support solid growth rates and further improve resilience to shocks.

The stable outlook reflects Moody’s expectations that Barbados will continue to reduce its debt burden while maintaining a prudent fiscal stance. Even so, the government debt burden and debt affordability will remain weaker than similarly rated peers. Despite the challenges posed by a potential economic downturn globally that could affect tourism activity in the country, Moody’s expects fiscal policy to remain prudent, limiting the risk of fiscal slippage.

Barbados’ ESG Credit Impact Score (CIS-3) reflects its high exposure to environmental risks related to climate change and social risks related to an aging population, which is mitigated by efforts to improve climate resilience, improve immigration policies and strong governance.

Upward pressure on Barbados’ rating could result from continued progress on fiscal consolidation and structural reform efforts that lead to a sustained decline in the government’s debt burden and improved debt affordability, beyond Moody’s current expectations. Sustained higher rates of economic growth, supported by successful implementation of structural reforms, coupled with clear evidence of improved competitiveness could also lead to a rating upgrade.

Negative pressure on Barbados’ rating could emerge if external shocks or lower policy effectiveness than Moody’s currently assess derail the government’s fiscal consolidation and structural reform efforts, reversing the favorable trend expected in debt burden and reducing its financing options. Renewed pressures on foreign-exchange reserves would introduce risks to external accounts, which could also lead to negative rating action.

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