Above: Bridgetown (CJ Photo)

By the Caribbean Journal staff

Barbados’ credit has been downgraded to “junk” status by Moody’s Investors Service.

The downgrade lowered the country’s foreign and local currency bond ratings to Ba1 from Baa3.

A junk bond, or one that is “below investment grade” due to a heightened risk of default, is any bond with a rating of Ba1/BB+ or lower, according to the system used by Moody’s.

Standard and Poor’s lowered Barbados’ rating to junk in July. (The country’s S&P rating is BB+).

Moody’s, which said Barbados’ outlook remained negative, cited two factors in the downgrade: Barbados’ “continuing lackluster economic performance,” and “ongoing deterioration in the government’s debt metrics.”

Barbados’ economy grew by 0.6 percent in 2011 and 0.2 through September of this year, well below expectations, according to the New York-based ratings firm. (The United Nations Economic Commission for Latin America recently projected the country’s GDP to improve in 2013 with a rate of 1 percent)

“Moody’s believes that the country’s growth prospects remain very limited due to its deteriorating competitiveness and declining productivity coupled with heavy dependence on tourism, particularly from the United Kingdom and the United States,” Moody’s said. “Given the prospects for continued low economic growth in those countries, discretionary spending on travel is likely to remain subdued.”

Over the last 10 years, Moody’s said, Barbados has grown at a compound average annual rate of just 1.2 percent, among the slowest for countries rated by the firm.

The firm also said that Barbados’ offshore business sector, the country’s second-most important industry, “also faces greater competition and is coming under increasing pressure from changes in tax laws in the US, Canada and the UK.” Barbados’ negative outlook considered that economic performance is likely to remain weak, it said.

“While the worst appears to be behind Barbados both in terms of fiscal deficits and economic deterioration, Moody’s anticipates that the government’s deficits will remain large for the next few years and its debt levels will continue to rise, albeit at a slowing pace,” it said. “Even if the country is able to consolidate its finances and stabilize its debt metrics, they are unlikely to improve meaningfully for the foreseeable future given its poor economic prospects.”

Now, Barbados’ government faces “difficult choices” in its stewardship of the economy.

“In the absence of significant corrective measures, debt metrics will continue to rise, and if the government does take such measures, it risks putting the economy back into recession,” Moody’s said. “On the other hand, many of the proposals to boost economic growth carry the risk of continued deterioration of the government’s financial position, at least in the near term.”

Moody’s announced that it had additionally revised Barbados’ local currency bond and deposit ceilings to Baa1, its long-term foreign currency bond and deposit ceilings to Baa2 and Ba2 respectively, and its short-term foreign currency deposit ceiling to NP.

“The rating will face further downward pressure unless the government is able to successfully navigate the current situation such that a clearly visible and easily achievable path to stabilizing debt metrics is established within the next 12-18 months, in which case the outlook could be revised to stable,” the firm said. “The rating could also be downgraded if pressures on the currency peg mount significantly.”