NEW YORK CITY--On Friday, Moody’s Investors Service downgraded the St. Maarten government’s issuer ratings from Baa3 to Ba2. Moody’s also changed the outlook to negative. This concluded the review for downgrade that began on February 10.
The key drivers behind the downgrade were policy differences with the Netherlands (the sole source of financing for St. Maarten) and untested access to alternative sources of financing.
“The negative outlook reflects the risk that political differences with the Netherlands may lead to a repeat of the funding problems St. Maarten faced at the end of last year. The local currency ceiling is lowered to Baa2 from A3 and the foreign currency ceiling is lowered to Baa3 from Baa1.
“The three-notch gap between the local currency ceiling and the sovereign rating reflects the limited role of the government in the economy. The one notch difference between the foreign and local current ceilings reflects the limited scope to impose transfer and convertibility controls within St. Maarten’s existing monetary union,” said Moody’s.
Differences between St. Maarten and the Netherlands on the implementation of policy measures led the Dutch government to temporarily withhold liquidity support at the end of 2020, and subsequently resulted in a delay in debt payments by St. Maarten.
Last December, the St. Maarten government missed a NAf. 50 million maturity repayment on debt owed to the Dutch government, a payment deadline that had been extended twice before.
The funding crisis happened after the twin shocks of Hurricane Irma in 2017 and the 2020 coronavirus COVID-19 pandemic pushed St. Maarten’s national debt to over 70 per cent of gross domestic product (GDP) in 2020 from less than 30 per cent of GDP prior to these events.
“Low-cost financing from the Netherlands, which on lends to St. Maarten at very low to concessional rate terms, has limited the debt’s rise impact on interest costs, but St. Maarten will continue to require substantial liquidity support,” said Moody’s.
Moody’s estimates the country’s borrowing requirements will be more than 11 per cent of GDP in 2021 and 2022.
The Netherland’s decision to delay liquidity disbursements highlighted St. Maarten’s lack of independent access to the capital markets, said Moody’s, adding that this is a credit negative development as the country’s debt burden continues to rise.
“Faced with this lack of liquidity support, the government of St. Maarten did not have alternative sources of funding. Moody’s expects that St. Maarten will continue to rely on funding from the Netherlands and remain subject to occasional liquidity constraints,” said Moody’s.
Future funding from market sources would imply higher interest costs, raising concerns about the government’s debt affordability, said Moody’s.
In recent months, the Dutch government have demanded policy reforms including renumeration cuts to public sector employees. To help implement these reforms, the Dutch government is seeking to create the Caribbean Body for Reform and Development COHO.
“St. Maarten’s process of developing its own institutions and meeting the requirements by the Netherlands will be a multi-year effort, and will be prone to occasional setbacks. Lack of progress in advancing these objectives may increase the risk that disagreements with the Netherlands will lead to another liquidity crisis,” said Moody’s.
The negative outlook reflects the risk that the slow pace of policy reform, including delays in approving and implementing the COHO will lead the Netherlands to once again withhold liquidity support, said Moody’s.
Moody’s could consider a stable outlook if the country “develops and implements a new, long-term credible funding process that eliminates the risk of another funding crisis.”
“Such a process would likely require acquiescence by the government of the Netherlands and a political agreement between the two nations,” said Moody’s.
Moody’s could consider another downgrade if the likelihood of another liquidity crisis increases.
“Lack of a clear plan to address long-term funding challenges, including changes to the current institutional arrangements governing debt management, could contribute to this rating outcome.
“Expectations of continued political confrontations with the Netherlands that raised the risk of a repeat of the recent funding problems would also negatively affect the rating,” said Moody’s.
