Anguilla Rating Rationale October 2013
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CREDIT RATING REPORT The Government of Anguilla October 2013 INSTRUMENT RATED RATING ASSIGNED USD 25 million Debt Issue (Notional) Cari BBB+ RATING HISTORY Date Foreign Currency Instrument/Remarks September 20, 2013 Cari BBB+ USD 25 million Debt Issue (Notional) September 28 , 2012 Cari A- USD 25 million Debt Issue (Notional) November 7, 2011 Cari A- USD 25 million Debt Issue (Notional) October 25 , 2010 Cari A USD 25 million Debt Issue (Notional) September 30 , 20 09 Cari A+ USD 25 million Debt Issue (Notional) July 29, 2008 Cari AA USD 25 million Debt Issue (Notional) September 21 , 2007* Cari AA USD 25 million Debt Issue (Notional) *Initial Rating Assigned RATING DRIVERS Analytical Contacts: Andre Joseph Strengths Tel: 1-868-627-8879 Ext. 227 E-mail: [email protected] • Support from the British Government as an overseas territory • Stable political environment with a history of broad policy Kathryn Budhooram Tel: 1-868-627-8879 Ext. 226 stability and very low but increasing levels of crime E-mail: [email protected] • Good financial market infrastructure but limited monetary Website: www.caricris.com policy flexibility Email: [email protected] Weaknesses • Poor and deteriorating loan portfolio quality Disclaimer: CariCRIS has taken due care • Limited fiscal flexibility on account of a narrow tax base and caution in compilation of data for • Limited access to funding, exacerbated by the breach of the debt this product. Information has been obtained by CariCRIS from sources management benchmarks which it considers reliable. However, • CariCRIS does not guarantee the Small, relatively narrow economic structure accuracy, adequacy or completeness of • External sector characterised by significant deficits on the any information and is not responsible for any errors or omissions or for the current account results obtained from the use of such information. No part of this report may be published / reproduced in any form Rating Sensitivity Factors without CariCRIS’ prior written • Sharp changes in the macroeconomic environment approval. CariCRIS is also not responsible for any errors in • Substantial changes in debt transmission and especially states that it 1 • has no financial liability whatsoever to Successful implementation of revenue increasing measures the subscribers/ users/ transmitters/ • A change in the island’s status as a British overseas territory distributors of this product. SOVERIGEN BACKGROUND Anguilla is the most northerly of the Leeward Islands in the Eastern Caribbean. Apart from the main island of Anguilla itself, which is sixteen (16) miles long and a maximum of three (3) miles wide, the territory includes a number of other smaller islands and cays, mostly tiny and uninhabited. The island is noted for its spectacular and ecologically important coral reefs. Anguilla is an internally self-governing Overseas Territory of the United Kingdom (UK) with a ministerial system of government. The 1982 Constitution (amended in 1990) provides for a Governor, an Executive Council and a House of Assembly. The Governor, Her Excellency Ms. Christine Scott, appointed by Her Majesty Queen Elizabeth II, has reserved powers in respect of legislation, and is responsible for external affairs, offshore finance, defence and internal security (including the police force) and the public service. The main industries in Anguilla are tourism, international financial services and fishing. Construction and tourism are the main sources of economic growth. Construction activity is being driven by private sector investment in hotel development. Anguilla’s economy is highly vulnerable to downturns in the global economy, high international oil prices and unfavourable weather conditions. 2 RATIONALE Caribbean Information and Credit Rating Services Limited (CariCRIS) has lowered the ratings of the USD 25 million notional debt issue of the Government of Anguilla (GoA) by one notch to Cari BBB+ (Foreign and Local Currency Ratings) from Cari A- (Foreign and Local Currency Ratings) on its regional rating scale. These regional scale ratings indicate that the level of creditworthiness of this obligation, adjudged in relation to other obligations in the Caribbean 1 is adequate . The downgrade of the ratings is being driven by the poor and deteriorating quality of the onshore banking sector loan portfolio which has culminated in the intervention of the Eastern Caribbean Central Bank (ECCB) into the operations of the two indigenous banks on the island. The combined assets of these two banks represent approximately 77% of the total banking sector assets of Anguilla. The prevailing high and growing non-performing loans (NPLs) of these two institutions has had a negative impact on capital adequacy levels and resulted in the ECCB having to intervene to maintain stability in the onshore financial system. The factors supporting the ratings are: Support from the British Government as an overseas territory Given its status as an overseas territory, there is a strong moral and possibly legal incentive for the UK to assist Anguilla in the event of a financial crisis, even though the UK does not have any significant economic interests or expatriate population on the island. To do otherwise could seriously impact Britain’s international and domestic reputation. The debt management framework that the British Government has implemented for its overseas territories is geared towards ensuring that its territories manage their fiscal affairs in a prudent manner. Oversight over all budgetary measures is provided by the British Foreign and Commonwealth Office (FCO) through the representative Governor. On occasion, the FCO has intervened to ensure fiscal prudence is maintained. While Anguilla has no explicitly committed resources from the 1 The term Caribbean as used here covers the following countries: The Bahamas, Barbados, Belize, The Dominican Republic, Guyana, Haiti, Jamaica, Panama, Suriname, Trinidad and Tobago and the following countries in the OECS: Anguilla, Antigua & Barbuda, Dominica, Grenada, Montserrat, St. Kitts & Nevis, Saint Lucia and St. Vincent & the Grenadines. Refer www.caricris.com for a more detailed explanation on CariCRIS ratings and rating definitions. 3 British Government, the latter did earmark EC $12 million to assist the GoA with its budgetary capital expenditure commitments in 2013; however, to date none of these funds have been received. This promised assistance followed a decision taken in 2010 to permit the GoA to access a policy-based loan from the Caribbean Development Bank (CDB), despite being in breach of the debt management framework, to refinance high cost commercial debt and fund the fiscal deficit. Stable political environment with a history of broad policy stability and very low but increasing levels of crime Since its separation from the legislative union with St. Kitts and Nevis in 1980, Anguilla has enjoyed a history of political stability with a smooth transition of power following general elections. The present Anguilla United Movement (AUM) government has a simple majority with four of the seven seats in the House of Assembly while the Anguilla United Front (AUF) holds two seats; the remaining seat is held by the Anguilla Progressive Party (APP). This enables the Government to comfortably pass legislation following approval from the Executive Council. The political governance structure in place in Anguilla also lends support to its stable political environment. The Executive Council, chaired by the Governor, is the supreme decision making authority in Anguilla. The Governor 2 and her office are responsible for national security, the offshore financial sector, the public service and overall good governance. All appointments to the office of Permanent Secretary are made by the Governor, and by law a Permanent Secretary cannot be moved following a change in government 3. CariCRIS believes that this has ensured broad economic policy stability over the years. This notwithstanding, there are no major philosophical differences amongst the political parties and CariCRIS does not expect any change in economic policy if there is a change of government. Relations between the Chief Minister and the UK Government have become increasingly strained with several public exchanges of correspondence taking place over the last 3 years. The most recent disagreement involved the passage of the 2013 budget and the government’s reluctance to agree to the terms of the new Framework for Fiscal Sustainability 4 (Debt 2 In July 2013, Ms. Christina Scott succeeded Mr. Allistair Harrison as Governor of Anguilla. She is the first woman to be appointed to that office. 3 In 2011, the Governor reshuffled the Permanent Secretaries among the various ministries, a move that was publicly opposed by the Chief Minister. 4 In addition to the revision of the debt management benchmarks, the framework incorporates procedures regarding the funding of projects by way of public-private partnership (PPP) agreements, and also the adoption of procurement standards and 4 Management Benchmarks). The delay in signing the new Framework resulted in a postponement by the UK Government in approving the fiscal 2013 budget; the budget was eventually passed following the Chief Minister’s eventual acquiescence of the Framework in April 2013, though with a couple of important concession negotiated in his favour. This latest disagreement follows several press releases and the publication of several letters between the Chief Minister, Governor and representatives of the UK Government