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The S&P downgrade


Published: Jan 09, 2017

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Dear Editor,

In relation to the downgrade, it is unfortunate and should serve as wake-up call for us as a nation. We cannot afford to bury our heads in the proverbial sand wishing that our economic challenges would disappear without deliberate and concerted efforts to address structural issues within our economy.

While it can be argued that S&P’s actions were not justified, as we have never defaulted on our debt, and we have been able to finance our debt so far, the reality is that the international credit ratings agencies have highlighted concerns that we must address as a matter of urgency. Government spending has to be curtailed, and we have to realize that we cannot tax ourselves out of this economic slump. Of course, we must strike the right balance based on the current composition of government expenditure to ensure that we do not worsen the current economic situation. At the same time, it is difficult to justify the continuous rise in government spending when the economy has not experienced notable improvements from this increase in public spending but has rather shrunk as seen in 2014 (-0.5 percent) and 2015 (-1.7 percent). There is no substitute for economic growth spearheaded by an incentivized private sector.

On the face of it, it may seem that the only impact that the downgrade will have will be on the cost of borrowing. However, there are other implications of this negative rating action, as it has the potential to impact foreign and local investor confidence. It also puts investment firms, pension plans, corporate entities and multinational companies and particularly NIB in a quandary insofar as their investment guidelines require them to invest in securities and sovereigns with investment grade ratings. Deviation from those guidelines (if permissible) would normally require them to demand higher returns to compensate for the risks associated with such an investment.

We will also need to monitor and be conscious of the potential snowballing effect this downgrade could trigger. In the absence of any positives to this rating action, the fact that Moody's has not followed suit provides a glimmer of hope that we have a short window to put our fiscal house in order by taking decisive prudent steps.

While Hurricane Matthew (and perhaps Joaquin) was cited in the narrative by S&P, which outlined the rationale for the downgrade, I believe we can all agree that the hurricanes were not solely responsible for the downgrade to junk bond status, although they may have played a part. As a matter of fact, Hurricane Matthew in a way stimulated the economy due to the foreign currency inflows specifically from reinsurance recoveries that spurred activity in the construction and retail sectors; this was reflected in the recent unemployment statistics. This rating action is a culmination of years of fiscal imbalance and deferment of crucial decisions necessary to address our structural financial issues.

The reality is that if one major hurricane could have the effect of causing our sovereign credit rating to be downgraded, then we have a major problem because we are in the hurricane belt and are susceptible to multiple hurricanes for six months every year. In the midst of our fiscal challenges and in the absence of a robust national disaster risk management plan, we are left exposed and vulnerable from an economic perspective if (God forbid) we have multiple hurricanes within a year or consecutive years.

 

– Government in Denial


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