CATEGORY:ECONOMY/MONEY -------------------------- INSIDE GRENADA SUNDAY August 5,2007 Standard & Poor's Ratings Services said on Wednesday August 01 that it raised its long-term sovereign credit rating on Grenada to 'B-' from 'CCC+', reflecting steps taken by the government to improve debt-payment management. Standard & Poor's also affirmed its 'C' short-term sovereign credit rating on Grenada. The outlook remains stable. According to Standard & Poor's credit analyst Olga Kalinina, improvements in debt-servicing procedures lower the risk of new domestic debt arrears. "Specifically, administrative measures taken by the government in June 2007 to streamline its debt-payment mechanism significantly reduce the risk of new intermittent arrears on Grenada's domestic commercial debt," Ms. Kalinina said. "At the same time, the likelihood of a new rescheduling of the 2025 bond remains slim. As such, the risk of imminent default on domestic and external debt has subsided, which is reflected in the rating upgrade," she added. Nevertheless, the ratings remain constrained by the persistently difficult fiscal situation and slower-than-expected economic recovery. Grenada's fiscal accounts and economic structure were severely impaired following 2004's Hurricane Ivan. While the ensuing debt restructuring in 2005 alleviated fiscal pressure by reducing interest costs by more than one-half and postponing the maturity of 45% of the total government debt (87% of total commercial debt) to 2025, the size of the fiscal debt remained at 118% of GDP, the third largest among speculative-grade-rated countries. Given this indebtedness, Grenada's fiscal sustainability hinges upon a resolute fiscal consolidation and a pick-up in economic activity, the expectation of which underpinned the post-default ratings. However, progress is below par in both of these areas. On the fiscal front, the deficit, at 7.1% of GDP in 2006 (4.5% on a general government level, including the 2.6% Social Security surplus) was worse than projected. The higher-than-expected deficits attest to the ongoing inefficiencies in tax revenue collection, declining inflow of grants, and difficulty in containing capital expenditure, especially in light of expenditure related to the Cricket World Cup. Mrs. Kalinina explained that a number of measures in the 2007 budget-including strengthening of the revenue collection departments, cutting tax exemptions, and working with the International Monetary Fund team under the Poverty Reduction and Growth Facility to set responsible fiscal targets-have been put in place to boost the fiscal accounts. However, the recently announced postponement of the VAT introduction (originally expected in October 2007), decreasing inflow of grants, pre-election spending pressures amid a polarized political situation, and ongoing large reconstruction needs are likely to work in the opposite direction, putting downward pressure on fiscal performance. As a result, Standard & Poor's projects only a gradual reduction in the fiscal deficit to 5.4% of GDP on a central government level (2.1% on a general government level) in 2007. "The stable outlook balances out the risk of continuing fiscal underperformance with a relatively favorable amortization profile on Grenada's debt," noted Mrs. Kalinina. "Any upward movement of the rating hinges on the government's success in improving its fiscal position and achieving economic growth that will put Grenada's high debt on the declining trend. Conversely, downward rating pressure would stem from the government's inability to keep deficits under control, which would make resolute debt reduction difficult and, hence, increase the risk of new debt renegotiations," she concluded. Re-printed from nnpnews