Moody’s Investors Service (“Moody’s”) has today affirmed the Government of St. Vincent and the Grenadines’ long-term B3 issuer ratings and short-term non-prime rating, and maintained the stable outlook.
The affirmation of the B3 ratings was driven by the following considerations:
1. Relatively modest impact of shocks on economic activity and expected recovery; however St. Vincent’s economy remains vulnerable to climate shocks with limited diversification prospects
2. Debt is projected to stabilize, albeit at higher levels, and debt affordability to remain stable; access to concessional financing provide liquidity for debt service payments stable outlook reflects Moody’s expectations that growth will accelerate this year, following the pandemic shock and volcano eruption last year, which will facilitate fiscal consolidation and help stabilize debt burden.
St Vincent and the Grenadines’ local-currency ceiling remains at Ba3 and the foreign-currency ceiling remains at B2. RATING RATIONALE FIRST DRIVER — RELATIVELY MODEST IMPACT OF SHOCKS ON ECONOMIC ACTIVITY AND EXPECTED RECOVERY; HOWEVER ECONOMY REMAINS VULNERABLE TO CLIMATE SHOCKS.
St. Vincent and the Grenadines was hit by two large shocks in quick succession. The pandemic hit in 2020 and, like much of the Caribbean, the economy suffered severe disruption in tourism activity as international travel came to a halt.
The following year, an eruption of La Soufriere volcano destroyed part of the island economy and caused significant damage to housing and infrastructure. Despite these two large shocks, SVG reported a relatively moderate economic contraction in 2020 and small positive real growth in 2021.
The economy contracted by an estimated 5.2% in 2020. In 2021, St. Vincent’s economy expanded 0.8% in real terms. We expect real GDP growth of around 4% in 2022 and medium-term growth to revert to pre-pandemic rates or around 2% on the back of ongoing rebuilding efforts and rebounding tourism activity.
Government capital expenditures will provide strong support for growth in the next 2-3 years. In 2021, capital spending amounted to 8.1% of GDP, accounting for more than a fifth of total government spending.
The economy was supported by international financial assistance that SVG received from multilateral donors, which enabled the government to begin rebuilding work relatively quickly after the volcano eruption.
Economic activity associated with rebuilding efforts and strong imports had positive spillovers on government revenues through tax and import duties collection in 2021.
We expect the economic recovery to solidify this year, as reconstruction efforts continue and tourist arrivals rebound, as the pandemic continues to recede.
St. Vincent’s economy, like much of the Caribbean region, is highly dependent on tourism and travel, which represents roughly 30% of economic activity and generated around 44% export receipts in 2019.
We expect tourism arrivals to rebound in 2022-23 as the pandemic recedes further and travel from key markets i.e., US, UK and Canada resumes. However, recovery in the tourism sector will be contingent on the speed of post-volcanic eruptions recovery efforts and vaccine distribution domestically.
The island economy is reliant on tourism and has limited diversification prospects, which constrains the country’s ability to achieve higher levels of sustained growth. Although the government has taken steps to support growth potential through infrastructure investment, including in the new airport and exploring geothermal energy, we do not anticipate growth dynamics to change significantly over the medium term.St. Vincent is part of the six-member Eastern Caribbean Currency Union (ECCU).
Following a fiscal deficit of around 5% of GDP in 2020 and 2021, Moody’s forecasts fiscal deficits to reach 7% of GDP in 2022 on account of continued infrastructure spending and transfers to the vulnerable. Before the pandemic, St. Vincent tended to maintain lower fiscal deficits.
Overall fiscal deficit averaged just under 2.7% of GDP between 2010 and 2020, which compared favorably with the average deficit for the median B-rated sovereign of 3.4% of GDP over that same period.Despite the increase in debt burden, which weakens the sovereign’s fiscal profile, debt remains highly concessional and debt service remains manageable.
Debt affordability will remain broadly stable, with interest-to-revenue ratio below 10% for 2022-23.Liquidity risks remain broadly contained due to continued access to concessional funding from bilateral official creditors and multilateral development banks, which supports the island’s infrastructure development projects and provides liquidity for debt service payments.
The government remains committed to reducing its debt burden over time, in line with ECCU criteria to 60% of GDP by 2035. Rebound inactivity and higher sustained growth would be needed to facilitate debt reduction. RATIONALE FOR STABLE OUTLOOKThe stable outlook reflects Moody’s expectations that growth will accelerate, which will facilitate fiscal consolidation and help stabilize debt burden.
A significant improvement in the government’s credit profile associated with a steady decline in the debt-to-GDP ratio could exert upward pressure on the rating.
Downward rating pressure could emerge if St. Vincent’s access to external liquidity on concessional terms were curtailed, leading to liquidity pressures that impact debt service payments.
If a large adverse environmental shock were to lead to a substantial deterioration in St. Vincent’s fiscal and debt metrics or materialization of contingent liabilities from state-owned enterprises or increased commercial borrowing would be credit negative.
