Credit Rating Report
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CREDIT RATING REPORT GOVERNMENT OF SAINT LUCIA August 2013 INSTRUMENTS RATED RATING EC $404.5 Million in Notes and Bonds Cari BBB (Foreign & Local Currency) Analytical Contacts: RATING DRIVERS Andre Joseph Tel: 1-868-627-8879 Ext. 227 E-mail: [email protected] Strengths • Monetary and exchange rate stability underpinned by membership in a quasi-currency board arrangement • Relatively diversified economic base Stefan Fortuné Tel: 1-868-627-8879 Ext. 228 • External sector characterized by moderate Balance of Payment E-mail: [email protected] performances and relatively low external debt Website: www.caricris.com Weakness Disclaimer: CariCRIS has taken due • Continued fiscal pressures resulting from declining revenue and rising care and caution in compilation of data expenditure, leading to rising debt levels for this product. Information has been obtained by CariCRIS from sources which it considers reliable. However, CariCRIS does not guarantee the Rating Sensitivity Factors accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the • Significant changes in the fiscal position results obtained from the use of such • Substantial changes in the debt stock levels information. No part of this report • Significant changes in the external indicators may be published / reproduced in any form without CariCRIS’ prior written approval. CariCRIS is also not responsible for any errors in transmission and especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this product. ABOUT THE SOVEREIGN Saint Lucia, ‘Helen of the West Indies”, is situated in the Eastern Caribbean, at the northern end of the Windward Islands chain. The total area of Saint Lucia is approximately 616 square km (238 square miles). Total population is estimated at 169,115, with the greater number of persons living around the capital, Castries. Average life expectancy is 76.8 years. Infant mortality is estimated at 20.2 deaths per 1,000 live births. The official language is English but French patois is widely spoken. Tourism is the mainstay of the economy with the main markets being the United States of America (USA), United Kingdom (UK), Caribbean and Canada. Additionally, agriculture, specifically bananas, plays a significant role in the economy. There is a small manufacturing sector, the most diverse in the Eastern Caribbean, producing clothing, beverages, corrugated cardboard boxes, as well as the assembly of electronic components and the processing of lime and coconut. A relatively small financial sector also exists. 2 RATING RATIONALE Caribbean Information and Credit Rating Services Limited (CariCRIS) has assigned the ratings of Cari BBB (local and foreign currency) on its regional scale to the EC $404.5 Million Debt Programme consisting of Notes and Bonds of the Government of Saint Lucia . These ratings indicate that the level of creditworthiness of the instruments in this debt programme, adjudged in relation to other obligations in the Caribbean 1 is adequate. The ratings are supported by: Monetary and exchange rate stability underpinned by membership in a quasi-currency board arrangement As a quasi-currency board, the Eastern Caribbean Central Bank (ECCB) has adopted a number of operating parameters which have served to limit exchange rate uncertainty and foster macroeconomic stability. The ECCB maintains external reserves at a level that is at least 60% of its monetary liabilities, and can make temporary advances to member governments amounting to a maximum of 5% of the government’s average annual current revenue. The holdings in any one government’s treasury bills cannot exceed 10% of the estimated current revenue of that government, and holdings of other government securities may not exceed 15% of currency in circulation and other demand liabilities. Relative to its Caribbean counterparts, the ECCB enjoys a greater degree of political independence. The fixed exchange rate peg at EC $2.70 to US $1.00, which has been in effect since July 1976, has underpinned price stability, a credible currency and a stable environment conducive to foreign investment and growth. Historically, inflation rates have been low and are among the lowest in the OECS with a 2-year average of 3.5% (2011-2012). However, in 2012 the annual average inflation rose to 4.2% from 2.8% in the prior year. Going forward, CariCRIS expects the inflationary pressures to be curtailed in line with moderation in international crude oil and food prices. The peg to the US dollar resulted in a real effective appreciation of the currency of 5.1% in 2012, indicative of a possible loss in external competitiveness. 1 The term Caribbean as used here covers the following countries: The Bahamas, Barbados, Belize, Costa Rica, 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 The financial sector in Saint Lucia is relatively small with 6 commercial banks, 16 credit unions, 26 insurance companies, 7 non-bank financial institutions and 1 development bank. Saint Lucia was a relative late starter in the offshore segment and has only 4 offshore banks. Licenses for both domestic and offshore banks are issued by the Minister of Finance, with the ECCB having sole responsibility for the supervision of the domestic banking sector, whilst the offshore sector is regulated by the Ministry of Finance. In spite of the passage of legislation for the establishment of the Single Regulatory Unit, the commencement of operations has been delayed following the change in government. A new board of directors has been installed and staff is currently being hired. Operations of the unit are expected to begin by the second quarter of 2013. The financial sector remains broadly sound, despite the challenging macroeconomic environment. Commercial banks remained well capitalized as the capital adequacy ratio stood at 19.2% in 2012, well above the regulatory minimum requirement of 8%. However, non- performing loans (NPLs) to total loans, which have trended upwards since 2007, increased to 15.3% in 2012 from 13.2% in 2011; well above the ECCB’s guideline of 5%. CariCRIS believes the asset quality of banks will continue to deteriorate given the subdued economic activity as well as the high levels of unemployment. The provisioning levels continue to be low, relative to its regional peers, in spite of the rise to 37.9% of NPLs in 2012 from a 5-year low of 23.2% in 2010. Despite sluggish economic activity, credit to the private sector has been on the increase since 2004, increasing by 5.1% in 2012 and with a 3-year average growth of 2.9%. While there were no bank failures in the recent past, in September 2009, the ECCB’s Monetary Council was instrumental in the provision of a resolution for British American Insurance Company Limited (BAICO) operations in the OECS, including Saint Lucia. BAICO's traditional policies were sold to Sagicor Financial Corporation in July 2012. For the executive premium annuities the ECCU has introduced a relief programme, which started in December 2012 and comprises two stages. In the first stage, policyholders with outstanding amounts of up to EC $30,000 will be paid. In the second stage, the liabilities to holders of Executive Flexible Premium Annuities (EFPAs) greater than EC $30,000 will be liquidated. Saint Lucia's own insurance funds, as well as the ECCU-level relief initiatives means that only EC $2 million of BAICO liabilities remain unmatched by assets and a resolution for this is near. Saint Lucia has limited monetary policy flexibility being a member of the ECCU. A minimum deposit rate of 3% is set by the ECCB whilst the lending rates are market determined contributing to the relatively stable interest rate environment. The deposit rate has averaged 3.1% in the last 3 years while the lending rate has averaged 9%. 4 The implementation of most of the recommendations in the IMF’s FSAP report, dated September 2004, has positively impacted the financial sector. As a member of the ECCU, Saint Lucia's financial market infrastructure and legislation is comparable to the rest of the region. Trading on the Eastern Caribbean Stock Exchange (ECSE) occurs twice weekly; however, the market is relatively under-utilized with only 13 equity securities listed. Meanwhile, the Regional Governments Securities Market (RGSM), a regional market for the trading of debt instruments of the member states of the ECCU, operates on a fully electronic platform. As at end of April 2013 the value of outstanding securities on the RGSM was EC $1,789.5 million; Government of Saint Lucia has been the most active on the RGSM accounting for EC $902.5 million or 50.4%. Moreover, a growing percentage of Saint Lucia’s public debt is sourced on the RGSM. As regards preparations for Basel II, the ECCB’s plans include assisting member states in drafting financial legislation to address the gaps in their supervisory and regulatory framework. Additionally, prudential guidelines on the treatment of assets, market, credit and operational risks amongst others were issued. As with many other Caribbean countries that have an offshore financial sector, the government of Saint Lucia continues to closely follow the legislative reforms of the United States of America (USA) as well as the Organization for Economic Cooperation and Development (OECD). Saint Lucia is in early stages of preparations for the USA’s Foreign Account Tax Compliance Act which becomes effective in 2014. Saint Lucia is on the OECD’s white-list having signed around 18 Tax Information Exchange Agreements (TIEAs). Relatively diversified economic base Saint Lucia’s real GDP 2 declined by 0.8% 3 in 2012, following expansions in the prior two years of 1.5% and 0.1% respectively.