May 2011 Financial News

S&P give Bahamas "Stable Outlook" rating

May 06, 2011

Higher debt levels were behind international credit ratings agency Standard & Poor's (S&P) affirmation of the Bahamas' BBB+/A-2 foreign and local-currency sovereign credit ratings, along with a favourable debt composition and projections for declining fiscal deficits.

Formally released earlier this week, the country's sovereign credit rating was graded as BBB+ long-term and A-2 short-term. Also unchanged were the A- transfer and convertibility assessment rating, and a 'stable' outlook assessment.

"The stable outlook reflects our expectation that the government will gradually reduce its fiscal deficit and will maintain a generally stable external financing profile," said S&P credit analyst Lisa Schineller.

The sovereign credit rating reflects S&P's estimation of how likely a sovereign government, in this case that of The Bahamas, is to both be able and willing to fully satisfy its future debt obligations to 'non-official' lenders, according to the S&P website. Lenders to the Bahamian government may consider the rating, along with other ratings or information, when determining the risk involved in lending to the government. The more risk-involved generally the higher the interest they will demand to lend funds. A rating of less than BBB- is considered 'speculative' and will often justify steep lending rates, for example.

A strong history of political and macroeconomic stability was factored into the rating, according to Schineller, who also described the composition of the debt as 'favorable'.

S&P is predicting that the ratio of debt to gross domestic product (GDP), at 33 percent for 2010, will rise less rapidly and come in at around 38 per cent by 2012. The ratio was at 20 percent for 2007. S&P cited 'countercyclical fiscal spending' as underlying the widening fiscal deficits that led to ballooning debt.

The economic downturn of 2008-2009 and the flat economy of 2010 resulted in reduced revenues for the government. Meanwhile it moved forward with programs that required borrowing to fund them, such as the building of roads, the installation of new water mains, the construction of new courts, the upgrading of the hospital and the reconstruction of the straw market.

"The government's fiscal profile has weakened during the last several years, but projections are for debt to rise more slowly as deficits decrease," read the release. S&P said that one-off revenue items were expected to offset low tax revenues during the current fiscal year. One-off items include items like the US$78.9 million coming from the sale of the Bahamas Oil Refining Company (BORCO) and $37.4 million from Baha Mar stamp tax and gaming tax payments this fiscal year.

S&P expects that by June tax revenues will stabilize, according to the release. However, referencing the tourism industry that accounts for 50 per cent of GDP and employs more than half of the labor force, S&P cautioned that reliance on that single product and a single market (the US) leaves the economy susceptible to economic harm.

Overall GDP growth in The Bahamas is expected to be around 2 percent to 2.5 per cent over the next few years, according to the release. S&P is forecasting growth of just above 2 percent for the 2011-2012 period. It forecast average growth in the US to be around 2.8 percent from 2011 to 2013, and improved performance in the tourism sector would gradually follow it. The credit ratings agency called the Baha Mar project, with its $2.6 billion in financing from the China Exim Bank and ongoing construction, a "positive development."

For many years, up until around late 2009, The Bahamas enjoyed an A- rating from S&P. Looking to future ratings, the release outlined the conditions under which they may improve or worsen.

"The ratings could come under pressure if The Bahamas' fiscal deterioration persists and the economic base erodes more severely. Conversely, we could raise the ratings if the government takes a more proactive policy response to reduce debt levels or if the Commonwealth's economic prospects strengthen," read the report.

By STEWART MILLER of the Nassau Guardian


Source:
Jamaica Observer
Friday May 6, 2011

http://www.jamaicaobserver.com/business/S-P-give-Bahamas--Stable-Outlook--rating_8756288#ixzz1LabYTnxa