Jul 2016 Financial News

Moody's puts Bahamas on review for downgrade

Jul 04, 2016

NEW YORK, United States, Monday July 4, 2016 – Moody’s Investors Service has put the BAA2 bond and issuer ratings of the government of the Bahamas on review for downgrade.

The respected international credit rating agency said on Friday that the decision was prompted by the continuing rise in risks to the Bahamas’ medium-term economic prospects and its fiscal strength.

“The review will allow Moody’s to assess the likelihood that economic growth prospects will improve, debt metrics will stabilize and government policy will effectively address its macroeconomic and fiscal challenges,” said Moody’s.

The ratings agency added that the review action indicated that the rating was likely to move down, and that the change could be by one notch or more.

The review is expected to be completed within two months, according to Moody’s.

“The first driver for the review is to allow Moody’s to assess to the likelihood that the decline in the Bahamas’ economic strength will be reversed over the medium term,” the agency said.

According to the latest national accounts report, published by the Bahamas’ Department of Statistics last month, the Bahamian economy grew on average 1.2 percent in 2010-13, after which output contracted in 2014 and 2015 by 1.1 percent on average.

Moody’s noted that this contrasted with previous assessments, published in 2014 and 2015, when the gross domestic product (GDP) had been estimated to have grown on a consistent basis.

The agency indicated that the Bahamas’ worsened economic performance was characterized by “persistently high levels of unemployment, stagnant credit to the private sector and declining investment, in part explained by the indefinite opening of the Baha Mar mega resort.”

Moody’s added that structural constraints related to the energy sector and labour market negatively impact costs for the tourism sector, which accounts both directly and indirectly for about 50 percent of GDP.

The agency added that given that these conditions are likely to persist in 2016 and 2017, it is unlikely that the Bahamas will return to its potential growth rate of about 1.5 percent in the short-term.

During the review, Moody’s said it will assess the volatility in GDP estimates reported in recent years.

The agency will also examine Nassau’s plans to put forward growth-supporting reforms, including the upcoming National Development Plan and a mortgage relief plan, to boost economic performance past 2017.

The review will also look at the Bahamas’ level of competitiveness relative to other similar economies to gauge the effect this has on its economic strength, Moody’s said.

According to the agency, the second driver of the review is to allow it to assess whether the Bahamas’ debt ratios are likely to stabilize.

The Bahamas’ government debt/GDP ratio has continued to rise since Moody’s downgraded the sovereign’s ratings to BAA2 and stabilized the outlook to an estimated 65.2 percent of GDP by the end of 2015/16 from 60.2 percent in 2013/14.

“Although the government has been able to reduce its fiscal deficit by introducing a value-added tax in January 2015, debt accumulation has persisted, weakening the Bahamas’ fiscal strength relative to BAA-rated peers, Moody’s said.

Moody’s said that during the review, it will examine the macroeconomic and fiscal conditions that would support the stabilization of the government’s debt metrics.

It will also assess the government’s plans to rein-in expenditures over the medium-term and what, if any, additional revenue measures may be implemented to further support the fiscal consolidation efforts.

The third driver of the review is to allow Moody’s to assess the government’s policy credibility and effectiveness in response to the ongoing macroeconomic and fiscal challenges.

The agency will also examine fiscal performance in recent years relative to budget targets, and the effectiveness of fiscal measures introduced to support deficit reduction efforts.

Given the persistent high level of non-performing loans, Moody’s said it will also look at banking sector regulation, as well as the Bahamas’ anti-money laundering/counter-terrorism financing framework in the context of heightened scrutiny of offshore centres and de-risking in correspondent banking.

The agency said it could downgrade the rating if the review were to conclude that government policy and strategy is unlikely to lead to a stabilization in the debt trajectory over the next two years.

 

Source:
Caribbean360
Monday July 4, 2016

http://www.caribbean360.com/business/moodys-puts-bahamas-review-downgrade