RATING agency Moody’s downgraded Barbados three notches on Monday.

A widening fiscal deficit, growing debt levels, expected decline in international reserves, and anticipated increase in pressure on the country’s currency peg were cited as reasons for the rating action.

Falling from a rating of Ba3 to B3 meant the country cleared an entire scale used to measure bonds considered to be speculative and subject to high credit risk.

Its credit risk was previously considered to be moderate.

And even though Barbados is still rated three notches above Jamaica (Caa3), the latest downgrade reflects a downward trend which started in 2009 and which accelerated towards the end of 2012, when the country’s sovereign debt lost its investment-grade rating.

Barbados’s fiscal deficit exceeded 11 per cent of GDP for its 2013/14 fiscal year due to lower-than-expected revenues and high government expenditure driven by public sector wages, financial support to loss-making public entities and significantly higher interest payments.

“The Government announced several fiscal adjustment measures, including widespread public sector layoffs, but we think the authorities will be challenged to meet a deficit target of six to seven per cent of GDP in the running fiscal year, given Moody’s projection of a GDP contraction of around one per cent this year,” said Moody’s in its rationale for the rating action.

Government debt levels rose to 97 per cent at the end of March, up from 85 per cent at the end of 2012.

“Interest rates now consume nearly 30 per cent of the Government’s revenues,” said Moody’s. “Government’s gross financing needs will be in excess of 30 per cent of GDP in 2014 and 2015, when short-term debt is included.”

International reserves were relatively stable at US$550 million throughout the first quarter of 2014, but that was because the Barbadian Government received an additional US$75- million bank loan in March.

However, Moody’s expects a current account deficit of eight per cent of GDP in 2014, while the rating agency sees private sector inflows continuing to dry up.

At the same time, central bank financing of government short-term debt, “a practice that became prevalent last year”, according to Moody’s, is expected to pressure Barbados’s currency peg to the US dollar.

The world’s second largest rating agency figures that Barbados’s ratings will continue to decline if “it becomes clear that the Government faces a trade-off between debt servicing and maintaining the currency peg”.

And, while an upgrade is unlikely given the negative outlook also assigned to the Caribbean country, Moody’s said it could stabilise the outlook if:

“The Government’s fiscal consolidation plan leads to a stabilisation of debt ratios; the economic outlook improves on a sustained basis with GDP reporting positive growth; the Government materially decreases its reliance on short-term debt and central bank financing; and international reserves steadily increase.”

Commenting on the downgrade, Barbados Leader of the Opposition Mia Mottley stated that it “cannot be business as usual” and that the “further downgrade by a staggering 3 notches must jolt us into our true reality”.

In his comment, CIBC’s chief emerging market economist, John Welch, observed; “We are concerned about the stark deterioration in the fiscal figures in 2013/2014, but the Government reacted to these unsatisfactory trends at the end of 2013 by increasing and accelerating implementation of fiscal reforms. Moreover, external accounts show significant improvement despite lower tourism growth. The Moody’s downgrade, as well as the S&P downgrade before, signals an imminent government debt restructuring, something we do not expect.”