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Moody’s expects 1.5 to 2 per cent growth for 2012-2013

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In explaining its decision to downgrade the Vincentian government’s ranking, US credit rating firm Moody’s Investors Service said the Vincentian economy declined for four years.{{more}}

Its assessment is the same as the International Monetary Fund, while the Eastern Caribbean Central Bank said the Vincentian economy grew by 0.4 per cent in 2011, after three years of decline.

But Moody’s said it expects 1.5 per cent to 2 per cent growth between this and next year.

It noted the economy’s small size ($700 million) and its heavy reliance on tourism and construction activity funded by foreign investment.

It further said a weak US recovery that has adversely affected tourism across the Caribbean, will continue to dampen potential growth.

Prospects for future growth “depend critically on improving the competitiveness of the tourism sector and the completion of a new airport, which is subject to considerable uncertainty and expected to strain government finances,” Moody’s said.

It said the public sector plays “an outsized” role in the economy and Government spending is “critical to generating employment, maintaining social entitlement programs, and funding infrastructure investment”.

St Vincent’s downgrade to B2 incorporates a marked deterioration of the government’s financial balance over the past five years, driven by elevated government spending on capital projects, primarily related to the construction of a new airport, and high current expenditure on public sector wages, social security transfers, and other benefits.

“Revenue growth has been limited by low growth and depressed tourism and banana export sectors, despite a broader tax base following reforms that included the introduction of value-added and excise taxes in the mid-2000s.”

It said the projected debt-to-GDP ratio in 2012 was a deterioration to 62 per cent in 2012, from 41.5 per cent in 2007, while debt metrics compare unfavourably with B-rated peers.

“We expect the government will find it difficult to rationalize spending and achieve the fiscal consolidation necessary to stabilize the debt and place it on a sustainable trajectory in the near term,” Moody’s said, adding that the government relies primarily on grants and concessional financing.

“It has also increasingly leveraged short-term debt issued on the ECCU’s (Eastern Caribbean Currency Union) regional government securities market, which reflects a lack of access to global markets and may elevate rollover risk.

“The rating action also captures increased susceptibility to external economic shocks. St Vincent runs a substantial and growing current account deficit funded by volatile FDI (foreign direct investment)

and development grants and the government is exposed to contingent liabilities from rising levels of debt held by public enterprises and a weak banking sector susceptible to regional contagion,” Moody’s said. (kentonchance@searchlight.vc)

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