As Grenada celebrates its 40th anniversary of independence, there is further bad news for the one-year old New National Party (NNP) government of Prime Minister Dr. Keith Mitchell.
One of the world’s leading credit-rating agencies, Standards & Poor has given the island another poor grade.
The agency has once again placed Grenada in the low “Selective Default” or SD category given the decision of the cash-strapped Mitchell government to suspend debt payments to creditors since it took office on February 19, 2013 in a clean sweep at the polls against the then ruling National Democratic Congress (NDC) administration of Tillman Thomas.
The new administration opted to default on payment of the island’s estimated EC$2.4 billion national debt and announced that it wanted to reschedule the debt as part of a Structural Adjustment Programme (SAP) with support from the Washington-based International Monetary Fund (IMF).
The latest report put out on Grenada by Standard & Poors hinted that the debt negotiations could take some time to conclude because the Ministry of Finance does not have the competent personnel to do the job.
Following are highlights of the report:
*The government of Grenada remains in default since announcing its intent to restructure its debt in March 2013.
*We expect that the debt restructuring will likely be a prolonged process as part of the government’s comprehensive program of economic growth and fiscal consolidation.
*Our ratings on Grenada remain ‘SD’, and we are affirming our transfer and convertibility assessment at ‘BBB-‘.
The ratings on Grenada reflect the government’s default in March 2013 on both foreign and local currency debt maturing in 2025.
The government of Grenada stopped servicing US$193 million in external debt and Eastern Caribbean dollar (XC$) 184 million in local currency debt. The defaulted debt was equivalent to 31% of general government debt in 2013.
Net general government debt totaled 95% of GDP at the end of 2013.
At the time of its default, the government announced its intent to negotiate a comprehensive restructuring of its large debt burden.
A creditor committee, representing more than 75% of the 2025 bonds, was formed in May 2013.
We expect the government’s proposed comprehensive debt restructuring could take considerable time, perhaps 12-18 months or more.
As part of this process, Grenada may, in our view, seek an agreement with the International Monetary Fund (IMF), establishing a framework for future economic policies.
Subsequently, the government could seek debt relief from its other creditors.
We think the large commercial portion of Grenada’s government debt – more than half- increases the probability of a reduction in principal, based on recent debt restructuring exercises of other highly indebted neighbors.
Official creditors hold 48% of the general government’s debt (based on July 2013 figures). Multilateral financial institutions hold 25% of general government debt, including the Caribbean Development Bank with 14% (three-quarters of which are concessional credits from the bank’s soft loan window), International Development Assn. (IDA) of the World Bank Group with 6%, and IMF with 3%.
PetroCaribe loans from Venezuela form 11% of general government debt. The remaining bilateral creditors hold 12%, and among these, Paris Club creditors hold 1% of general government debt.
Although Grenada has a stable political system, its political institutions and debt management capacity are weak, contributing to the likely prolonged debt restructuring process.
The government of the New National Party, which controls all 15 seats of the lower chamber of parliament, has a legislative mandate to negotiate debt restructuring.
The government’s early passage of the 2014 budget (which includes new tax revenue measures, plans for capital works to stimulate the economy, and a wage increase for civil servants) may facilitate the agreement of a new program from the IMF.
However, Grenada suffers from limited bureaucratic capacity to implement reforms. Key to the success of any long-term recovery plan, and to the future rating on the sovereign’s debt, is the ability to sustain economic growth, particularly private-sector growth.
The transfer and convertibility assessment reflects Standard & Poor’s view that the risk of the Eastern Caribbean Currency Union (ECCU) restricting access to foreign exchange that Grenada needs for debt service is commensurate with ‘BBB-‘ risk.
The ‘BBB-‘ risk assessment reflects our view of ECCU’s limited use of foreign exchange restrictions during periods of stress, as well as its current and expected policy stance.