Moody's Investors Service has downgraded Barbados' government bond ratings, saying the revision comes after "years of deterioration" in the tiny country's credit metrics, nine years after the last review which resulted then in an upgrade.

"Barbados' key debt indicators have been on a deteriorating path over the past decade, and are now at levels that compare poorly with other countries in the same rating category," said Moody's Vice-president - Senior Analyst Alessandra Alecci.

"While the global crisis has clearly exacerbated this trend, the worsening of debt indicators over a long period of time suggests that structural issues are at play."

The country is now rated Baa3 on its foreign currency bonds, down a notch from Baa2; and Baa2 on its local currency bonds, down from A3. The outlook is stable.

The country ceiling has also been cut from A1 to A3 on foreign-currency bonds, and from Baa2 to Baa3 on foreign-currency bank deposits. The Aaa2 rating on local currency deposits and bond ceilings was unchanged.

Barbados is a country of 270,000 people whose major industries include offshore insurance and other financial services, as well as tourism.

In late July, Barbados announced it was in recession but Prime Minister David Thompson said then his country would not seek an arrangement with the International Monetary Fund (IMF) as it did previously in the early 1990s when the economy went into a deep recession.

Steady increase in expenditures

Central Bank Governor Marion Williams said gross domestic product (GDP) had contracted 3.0 per cent in the first two quarters, but that Barbados had sufficient foreign reserves and was not in crisis.

Moody's said its concerns relate to steady increase in expenditures, including off-budget items, even though revenue, relative to GDP, has been flat.

"Since the last rating change in 2000, Barbados' central government debt stock has more than doubled and is expected to well exceed 100 per cent of GDP by the end of this year, from 65 per cent in 1999," said Alecci Wednesday.

"Relative to revenues, the debt burden has increased significantly and is well above the average for the same rating category."

Still Barbados, having hit economic roadblocks before, has a track record of resilience, according to the ratings agency.

Moody's foresees no balance of payments problems, nor any disruptions in short-term financing of government operations. Its current rating was also helped by high per capita income, and the distribution of its liabilities, most of which is owed locally to banks and public institutions thereby, the rating agency said, "reducing rollover risk".

Still Moody's is not convinced that the strategies that Barbados is now pursuing would position the country, given its increased debts, to withstand external economic shocks.

Counter-cyclical fiscal policies

"The government is undertaking counter-cyclical fiscal policies from an already relatively weak fiscal position and, taking into account the impact of the recession on debt dynamics, a further worsening of debt metrics is probable over the next couple of years," said Alecci.

A reduction in debt-to-GDP ratio to 70 per cent that Barbados hopes to reach in a decade once the current financial crisis eases requires, said Moody's, "a sustained decline in expenditures and relatively benign macroeconomic conditions" and could pose challenges.

lavern.clarke@gleanerjm.com