Grenada's fiscal accounts were severely impaired following 2004's Hurricane Ivan. The ensuing debt restructuring in 2005 alleviated the amortisation and cost profile of Grenada's debt.

The interest cost was cut by more than one-half, while the maturity of 45% of the total government debt (87% of total commercial debt) was postponed to 2025. However, the restructuring did not address the size of the debt, which, at 121% of GDP, is the third largest among speculative-grade-rated countries.

Given this indebtedness, Grenada's fiscal sustainability hinged upon a resolute fiscal consolidation, the expectation of which underpinned the post default ratings. However, the fiscal performance has been worse than projected (despite cumulative real GDP growth of 14.5% in the 2005-2006 time period), attesting to the ongoing inefficiencies in tax revenue collection, declining inflow of grants, and difficulty of containing capital expenditure.

The fiscal deficit was 7.2% of GDP in 2006 on the central government level (4.6% deficit for the general government), which is worse than the budgeted 3.1% of GDP and down from the surplus of 0.5% in 2005.

This fiscal deterioration led to the increase in the general government debt to 121% of GDP in 2006 (109% on a net basis), up from 118% in both 2004 and 2005, raising concern over the future sustainability of Grenada's debt profile. At the same time, rising fiscal pressures resulted in recurring delays in government debt payments, with the Grenadian government running intermittent arrears on domestic commercial bank debt.

Although these arrears have been cleared, the government's precarious fiscal situation increases the risk of future arrears. The government is trying to address its fiscal deficiencies by introducing a VAT in October 2007, cutting tax exemptions, and working with the International Monetary Fund (IMF) team under the Poverty Reduction and Growth Facility to set responsible fiscal targets.

Though these measures are important steps toward reversing recent fiscal slippage, risk to the fiscal scenario remains and includes the uncertain performance of a VAT, decreasing inflow of grants, pre-election spending pressures amid a polarised political situation, and ongoing large reconstruction needs.

Hence, Standard & Poor's projects the 2007 fiscal deficit at 4.7% of GDP, compared with the budgeted 2.7% of GDP. To address its debt situation the government entered into negotiations with Paris Club creditors to restructure its official debt, and a first agreement that further enhances the debt profile has already been signed.

Government debt is expected to decline to 117% of GDP by year-end 2007. On the positive side, the ratings reflect higher economic growth expected over the next several years, based on significant reconstruction activity and the gradual recovery of major economic sectors.

The real economy has been growing, supported (in 2005-2006) by gains in construction, tourism, and (recently) agriculture. Although the gains in the construction sector will decline over time, as Cricket World Cup (CWC) spending is over and once reconstruction activity slows, it is hoped that the tourism sector will once again become the leading economic engine.

This expectation is supported by the large foreign-investment tourism projects forecasted to start in the near future in Grenada.
These projects, which are currently either in the financing or early development stage, will (if they materialise) significantly boost and favorably reposition Grenada's tourism industry and provide a solid footing to the country's GDP growth.

The stable outlook reflects the low expectation of a new rescheduling of the 2025 bond. Risk to Grenada's government commercial debt service pertains mostly to its domestic bank loans and domestic debt that was not part of the 2004 restructuring.

In this regard, the outlook balances out the risk of continuing fiscal under performance with a relatively favorable amortisation profile on Grenada's debt. Any upward movement of the rating hinges on the government's success in improving its fiscal position and payment culture.

In this light, the pace of the economic recovery would be an important factor in boosting fiscal accounts and bringing down the debt. Conversely, downward rating pressure would stem from the government's inability to keep deficits under control, which would make resolute debt reduction difficult and, hence, increase the risk of new debt renegotiations.

(Excerpts from the latest report from Standard & Poor¹s on Grenada¹s economic performance)