CMC (Adapted) – The United States-based rating agency, Standard & Poor’s (S&P), has affirmed its ‘BBB-/A-3’ sovereign issuer credit ratings on Montserrat adding that the outlook remains stable.
“Our ‘BBB-‘ transfer and convertibility assessment is unchanged. The ratings on Montserrat reflect the United Kingdom’s institutional and budgetary support of the island, which is an internally self-governing overseas territory of the U.K.
“The U.K., through the Department for International Development (DFID), and the EU contribute roughly half of GDP in grants for budget support and infrastructure investment,” it said.
S&P in explaining the rationale for the maintaining the rating said Montserrat has a stable parliamentary democracy, with broad United Kingdom support that bolsters the island’s institutional and governance effectiveness.
But it noted that a recent report on the quality and oversight of DFID programmes by the U.K.’s Independent Commission for Aid Impact cited a need to better align capital projects to a national development strategy oriented toward national self-sufficiency, to rationalize project expenditures, and to further promote private long-term investment where possible.
The same report reiterated the collaborative relationship between U.K.-DFID and the Government of Montserrat, S&P said.
It said that a 2012 memorandum of understanding also affirmed London’s support for the island’s long-term development goals.
“Following volcanic eruptions in the mid- to late-1990s, Montserrat’s population has more than halved to 5,000 people, and the southern two-thirds of the Caribbean island has been closed to habitation and to most business activity,’ S&P said, noting that the population remain vulnerable to hurricanes, earthquakes, and volcanic eruptions, with the Soufriere Hills volcano remains active at a low level.
“Today, the island’s narrow economy, with per capita income of US$12,500, is concentrated on small-scale tourism and volcanic sand and bottled water exports. It remains highly dependent on foreign transfers for government services and foreign exchange.
“Access to the island is hindered by the lack of a breakwater and port at the future town centre and by limited air service. These factors have contributed to Montserrat’s less than 1% annual real per capita economic growth since 2007.”
But S&P said the development of a new port at Carry’s Bay and of a new town centre at Little Bay is progressing slowly.
“The Montserratian government has redesigned the development plans over the past few years to make the project more cost effective and components of it attractive for private-sector participation. However, construction of a critical, first-stage breakwater and jetty have yet to begin.
“Montserrat has a low net general government debt burden of four per cent of gross domestic product (GDP) and a low interest burden of less than one per cent of government revenues thanks to U.K. and EU grant support.
“We expect that external grants of nearly 87 per cent of current account receipts (CAR) – or just over 50 per cent of GDP – that Montserrat will receive in 2013, plus net foreign direct investment, portfolio equity investment, and other external borrowing totalling nine, one and 16 per cent of CAR, respectively, will cover the island’s external financing needs. “
It said Montserrat’s external financing needs total upwards of 150 per cent of CAR and usable reserves. “As the development of the port and town centre progresses over the next few years, we expect imports of construction materials and capital goods will raise Montserrat’s external financing gap. The island’s indigenous banks remain net external creditors.
““However, they could reverse this position in favour of domestic lending if private-sector investment opportunities materialize around the port and new town centre on the island. Like many Caribbean peers, Montserrat does not publish an international investment position, which contributes to material inconsistencies of external data,” S&P added.
In last year’s Overview, S&P reported: “U.K. institutional and financial support for Montserrat remains strong, which we expect will continue to support Montserrat’s medium-term fiscal sustainability and low debt burden.
As a result, we are affirming the ‘BBB-/A-3’ sovereign credit ratings on Montserrat.
The outlook is stable, reflecting our expectation that the U.K. and EU’s strong institutional and financial support of Montserrat will continue through the medium term and foreseeable future.
