By Caribbean News Now contributor
NEW YORK, USA -- On Tuesday, Standard & Poor's Ratings Services raised its foreign currency sovereign credit ratings on Grenada to 'CCC+/C' from 'SD/SD'. The agency also affirmed its 'CCC+/C' local currency ratings on Grenada. The senior unsecured foreign currency rating on the US$193 million bond due 2025 is also 'CCC+'. The outlook on the long-term ratings is negative.
“The large and persistent fiscal and external deficits, debt management difficulties as a result of weak liquidity, and dim near-term growth prospects limit our ratings on Grenada. The government's access to the Caribbean Regional Government Securities Market, as well as funding and aid from multilateral and government sources, support the ratings,” S&P said.
On October 12, the government of Grenada sent funds to its paying agent that were sufficient to pay holders of its US$193 million bond in full for the interest owed to them since September 15, 2012.
“This, in our opinion, cured the default on the foreign currency debt. The payment was made within the 30-day grace period indicated in the issue documentation, but we view a missed payment as a default if it is not paid within five days of the due date, according to our criteria,” S&P said.
The government of Grenada remains current on its local currency obligations.
“In our opinion, the liquidity pressures on the government of Grenada's overall finances remain acute. We project economic growth of less than 1% in 2012, as foreign direct investment remains low and the tourism industry continues to struggle (for example, a large hotel announced this week that it will close)” S&P added.
The continuation of several tax exemptions have contributed to lower-than-budgeted revenues. The government plans to reduce planned capital expenditure drastically for the second half of 2012 and likely into 2013, which will be accompanied by lower foreign grants and multilateral loan disbursements. Although the government has remained current on its local currency obligations and was able to issue EC$12 million (US$4 million) of Treasury bills on the Caribbean Regional Government Securities Market recently, liquidity pressures have caused the government to delay public-sector wage payments twice in recent months.
Grenada's external imbalances are also high. The nation's large structural current account deficits (greater than 20% of GDP) contribute to large external financing needs (more than 200% of current account receipts and usable reserves). Grenada has a large net external liability position of about 750% of GDP. Gross external debt is approximately 100% of GDP.
The current political environment makes significant fiscal policy changes or resumption of disbursements under the current IMF extended credit facility (which expires in April 2013) unlikely until after parliamentary elections (due by mid-2013).
The leadership of the majority National Democratic Congress (NDC) party, elected in 2008, a few months before the US financial crisis, has fragmented, and several cabinet minister resignations culminated in the dismissal of party members at the NDC Party Convention in late September. The ousted NDC party members have not coalesced into a new party to date. The New National Party is the principal opposition and served for 13 years in the previous administration.
Debt service could become an election issue, especially the interest rate step-up provisions of the bonds due in 2025. Grenada restructured its commercial debt in 2005 and its Paris Club debt in 2006 after Hurricanes Ivan (2004) and Emily (2005) destroyed much of the island's infrastructure and agricultural capacity.
The negative outlook reflects the potential for a downgrade if liquidity pressures remain acute and funding options become more limited over the next 12 months.
“We would likely lower the ratings if the government were to delay another interest payment, or if it were to seek a debt rescheduling, or if political risk were to increase. We could revise the outlook to stable if the government's funding profile improves (most likely through an IMF agreement in the short term and a more sustainable economic and debt trajectory over the medium term),” S&P concluded.