Sources:
Antigua Observer: Caribbean Development Bank loses top-rated ‘AAA’ status – S&P
Caribarena Antigua: CDB Downgrade Effects Unlikely
CBS News: S&P affirms reduced U.S. credit rating
Stabroek News: Caribbean struggling with debt
In
the wake of the recent global financial crisis, many countries and
banks are seeing a decline in their credit rating. The Caribbean
Development Bank (CDB) is no exception. Both American credit rating
agencies, Moody’s and Standard & Poor’s (S&P), recently
downgraded the CDB from the top rating (AAA) to the second best rating
(AA1 for Moody’s, AA+ for S&P). Both credit rating agencies
attribute the decline in ratings due to the weakness in CDB’s risk
management as well as rising national debt among the Caribbean nations,
who are all CDB’s customers. Despite the decline in credit rating,
S&P is optimistic that CDB can recover its credit rating. S&P
contributes its optimism to the strong relationship CDB has with its
Caribbean customers and its strong capitalization—the sum of a bank’s
invested cash.
Risk
management includes supervising, regulating, and avoiding investment
risks. For a bank, risk management is often associated with avoiding bad
debt, but also includes ensuring general financial stability. Much of
the financial crisis of 2008 and 2009 is credited to poor risk
management by financial institutions.
Both
Moody’s and S&P justify the downgrade of the CDB due to weaknesses
in the Bank’s risk management that led to reduced liquidity—a bank’s
cash on hand—and a low number of borrowers. To avoid financial risk, a
bank will have a high level of liquidity and a wide range of borrowers. A
bank must maintain sufficient liquidity to pay its obligations when
they come due, and thus lower liquidity increases risk of not having
enough cash to meet the bank’s obligations. Also, a wide range of
borrowers is beneficial because it reduces the impact of a single
borrower’s default as revenue continues to come in from the many other
borrowers. Last year, the CDB saw its liquidity significantly reduced;
in the past, the CDB has held enough liquidity to pay 200% of its debt
coming due in 1 year or less, but last year it only have enough
liquidity to pay for 143%. In addition, five countries account for 63%
of the CDB’s loans. Because many of these Caribbean countries have been
facing rising credit vulnerabilities, the CDB’s concentration of
borrowers has increased its exposure to financial risk.
Another
reason for the CDB’s credit downgrade is the rising credit
vulnerability in the region, which is a result of high levels of public
debt among Caribbean countries and slow regional economic growth. Among
Caribbean countries, net public-sector debt—the amount of government
debt minus its cash on hand—increased to 57% of regional gross domestic
product (GDP) in 2011, up from 37% in just 2008. On an individual basis,
some Caribbean countries have debt burdens of 100% of their GDP or
more—a high debt burden is often associated with reduced economic
growth.
Despite
the poor regional economic outlook and downgrade of the CDB, S&P
provided the CDB with a positive and stable short-term year outlook.
This outlook is based on its strong relationship with the member
countries who borrow from the CDP, as well as its strong capitalization.
In addition, the CDB is responding to the downgrades by evaluating and
implementing improvements in its risk management, which S&P
specifically said would help improve the CDB’s rating in the future.
However, the CDB has not stated the specific improvements it will make
to its risk management.
While
the CDB’s downgrade is a difficult setback, it is largely a reflection
of the current financial difficulties worldwide. For example, S&P
recently affirmed downgrading the United States’ credit rating, which is
equal to the downgrade it gave the CDB. However, the outlook for the
CDB is stable and positive, and it hopes to reaffirm that positive
outlook by fixing its current weakness in risk management.
