Rating Action: Moodys downgrades St Vincent and the Grenadines rating to B3 from B2; outlook negative Global Credit Research - 21 Nov 2014 New York, November 21, 2014 -- Moodys Investors Service has today downgraded St. Vincent and the Grenadines government bond ratings to B3 from B2 and changed the outlook to negative from stable. The sovereigns short-term foreign-currency and local-currency ratings are affirmed at Not Prime (NP). The key drivers of todays rating action are the following: 1) External vulnerabilities have increased markedly following a strong weather-related shock in December 2013. 2) The fiscal deterioration from 2013 is set to continue in 2014, leading to weaker public debt ratios and substantial downside risks to debt sustainability. St. Vincent and the Grenadines long-term local-currency country risk ceilings, foreign currency bond ceiling, and foreign-currency bank deposit ceilings remain unchanged at Ba3. The short-term foreign currency bond and deposit ceilings remain at NP. These ceilings reflect a range of undiversifiable risks to which issuers in any jurisdiction are exposed, including economic, legal and political risks. These ceilings act as a cap on ratings that can be assigned to the foreign and local-currency obligations of entities domiciled in the country. RATINGS RATIONALE The principal drivers of Moodys decision to downgrade St. Vincents sovereign rating are the marked increase in external vulnerability and deterioration in external finances. Following the global economic crisis, St. Vincents sluggish economic recovery was derailed by a strong weather-related shock in December 2013. The country suffered massive damage to infrastructure, housing, and agriculture as a result of severe floods. Tourism activity in 2013 contracted by 3.5%, contributing to a deterioration in already-weak external finances. The current account deficit reached just under 30% of GDP by the end of 2013. For 2014, Moodys forecasts that a further weakening of tourism activity, along with increased imports of construction materials related to the reconstruction effort, are likely to more than offset the respite brought about by lower import prices on fuel and other commodities, pushing the current account deficit to nearly 34% of GDP by the end of the year. As a result, external finances had come under severe stress by mid-2014, prompting the authorities to request emergency assistance from the International Monetary Fund (IMF). In early August, the IMF approved the disbursement of approximately $6.4 million (0.9% of GDP) to St. Vincent through its Rapid Credit Facility (RCF) and Rapid Financing Instrument (RFI). Although the emergency funding alleviates the immediate pressure on St. Vincents external accounts, the countrys vulnerability to exogenous shocks remains elevated, and downside risks to balance of payments sustainability remain, stemming from uncertain tourism prospects. The second driver of the rating action is the continued deterioration in government finances and substantial downside risks to debt sustainability. A widening of the fiscal deficit in 2013 to 6.4% of GDP from 2.1% the previous year led to an increase in debt to 63.1% of GDP from a low of 41.5% in 2007. The authorities announced their intention of further boosting capital spending in 2014 in order to repair damaged infrastructure and continue building climate resistance. The budget speech in January envisioned a widening of the fiscal imbalance to around 9.5% of GDP, which Moodys estimates would push debt ratios slightly above 70% of GDP. Stabilizing debt ratios at under 71% of GDP and then reversing negative debt dynamics would require the effective execution of the authorities plans. Moodys believes there are substantial downside risks to the fiscal outlook and debt sustainability; these doubts underpin the negative outlook on the B3 rating. Slow disbursement of grants and financing could prolong reconstruction projects and delay the projected recovery in tourism revenues. Such a recovery depends on critical infrastructure being fully repaired, and importantly, the new airport being completed. Further downside risks that support the negative outlook on the sovereigns rating relate to the possibility that the economy may not respond to the planned fiscal stimulus measures, suggesting that debt sustainability may also be jeopardized by the slower recovery. WHAT COULD MOVE THE RATING UP/DOWN Moodys sees limited potential for upward rating changes in the immediate future. Faster growth driven by the completion of Argyle 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 governments balance sheet through a marked reduction in debt metrics or diversification and increase of funding sources would place upward pressure on the sovereigns rating. A significant reduction in external vulnerabilities would also create upward pressure. Conversely, a further deterioration of the public sector balance sheet, the assumption of contingent liabilities, or increased commercial borrowing to finance potential cost-overruns related to the Argyle airport would be creditnegative. Downward pressure on the rating will also arise if access to grants and concessional finance were to deteriorate or if a large external shock were to jeopardize balance of payments sustainability. GDP per capita (PPP basis, US$): 10,560 (2013 Actual) (also known as Per Capita Income) Real GDP growth (% change): 2.4% (2013 Actual) (also known as GDP Growth) Inflation Rate (CPI, % change Dec/Dec): 0.2% (2013 Actual) Gen. Gov. Financial Balance/GDP: -6.3% (2013 Actual) (also known as Fiscal Balance) Current Account Balance/GDP: -29.6% (2013 Actual) (also known as External Balance) External debt/GDP: 49.8% (2013 Actual) Level of economic development: Low level of economic resilience Default history: No default events (on bonds or loans) have been recorded since 1983. On 20 November 2014, a rating committee was called to discuss the rating of the St. Vincent and the Grenadines, Government of. The main points raised during the discussion were: The issuers fiscal or financial strength, including its debt profile, has materially decreased. The issuer has become increasingly susceptible to event risks. The principal methodology used in these ratings was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy page on moodys for a copy of this methodology. The weighting of all rating factors is described in the methodology used in this rating action, if applicable. REGULATORY DISCLOSURES For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moodys rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support providers credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on moodys. For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity. Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review. Please see moodys for any updates on changes to the lead rating analyst and to the Moodys legal entity that has issued the rating. Please see the ratings tab on the issuer/entity page on moodys for additional regulatory disclosures for each credit rating. Jaime Reusche Vice President - Senior Analyst Sovereign Risk Group Moodys Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Alastair Wilson MD-Global Sovereign Risk Sovereign Risk Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moodys Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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Posted on: Tue, 25 Nov 2014 10:37:41 +0000
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