Moody’s predicts growth, stable outlook for SVG over next two years

Moody’s Investors Service (Moody’s) last Thursday changed the outlook on the Government of St Vincent and the Grenadines’ B3/NP issuer and B3 government bond ratings to stable from negative and affirmed the ratings.

“The rating action reflects our expectation that faster growth and lower fiscal deficits will keep St Vincent’s debt metrics consistent with B-rated peers. Real GDP will likely increase closer to 2% this year and next, after averaging only 0.5% per year from 2010 to 2015.{{more}} We forecast debt will end at 260% of revenues in 2016, similar to the 234% median for ratings peers,” the statement from Moody’s said.

“The stable outlook reflects our view that while debt will likely continue to rise in the next two years, the increase will be moderate and debt affordability will continue to be supported by low interest funding from multilateral and bilateral creditors.

“The local currency ceiling remains unchanged at Ba3. The foreign currency bond and bank deposit ceilings also remain unchanged at Ba3/NP.”

“After years of weak economic growth St Vincent is poised for a modest recovery, with real GDP forecast to grow 2% on average until 2018. St Vincent, like most other Caribbean nations, is highly dependent on tourism, which represents almost 25% of economic activity, either directly or indirectly. Most tourism is from the US and with the recent economic recovery in the US, growth has also picked up in St Vincent. Last year stay-over tourist arrivals rose 6.6% relative to 2014, compared with an average increase of only 0.1% since 2010.

“Further growth may result from the opening of a new international airport. In construction since 2008, lack of necessary funding has delayed the start of operations of Argyle international Airport. Since currently there are no direct flights to the capital city of Kingstown from North America or Europe, the new airport will likely lead to an increased flow of tourists, a development we anticipate will have a multiplier effect on the economy.

“Economic growth should help limit the increase in the debt burden, which remains on par with peers but has been rising in recent years. Debt to GDP will end at 72% this year, compared to 60% in 2012. Low interest funding from developments banks has helped keep interest payments stable, despite the increase in debt. We estimate interest payments will represent 9% of revenues in 2016, a similar percentage as in 2012, and lower than the B-rated median of 10%.

“St Vincent’s B3 rating remains constrained by its small and undiversified economy. The country is highly susceptible to weather-related shocks and it relies heavily on grants and multilateral lending for its funding needs. Fiscal flexibility is limited as well as overall policy effectiveness reflecting a weak institutional framework and lack of timely and adequate macroeconomic data.

RATIONALE FOR ASSIGNING A STABLE OUTLOOK

“The stable outlook reflects our expectation that the fiscal deficit will remain moderate over the next two years limiting the increase in the debt burden. Fiscal deficits averaged 3.5% of GDP since 2011 but that should fall to 2.5% in 2016, on the heels of increased tax compliance efforts and faster growth. The government aims to reach fiscal results close to balance by 2018, an ambitious target which we anticipate will be extremely hard to reach given historical performance.”

The report said Moody’s saw limited potential for upward rating changes in the immediate future. Faster growth, driven by the completion of the Argyle International Airport and the expected associated increase in FDI in the tourism sector would be credit positive and supportive of the rating. A significant strengthening of the government’s balance sheet, through a marked reduction in debt metrics or diversification of funding sources, would place upward pressure on the sovereign’s rating. A significant reduction in external vulnerabilities, particularly a drop of the current account deficit, which reached almost 30 per cent of GDP last year, would also create upward pressure.

A further deterioration of the government balance sheet, the assumption of contingent liabilities coming from state owned companies, or increased commercial borrowing to finance potential cost overruns related to the Argyle airport would be credit negative. Downward pressure on the rating would also arise if access to grants and concessional finance were to deteriorate, or if a large external shock – such as a major hurricane – were to jeopardize balance of payments sustainability.