Aug 2016 Financial News

Bahamas Gets Rating Downgrade But Government Not Losing Sleep Over It

Aug 29, 2016

NASSAU, The Bahamas, Saturday August 27, 2016 – International credit rating agency Moody’s Investor Services has lowered the Bahamas government’s bond and issue rating, citing low medium-term growth prospects and an increase in the debt ratio as the key reasons for the downgrade.

Although” disappointed” by the decision, the Perry Christie administration is not too worried, saying the country’s credit risk remains investment grade. It is also taking comfort in the stable outlook assessment given by Moody’s, contending that it “acknowledges that the economic developments underway stand to enhance the resilience of the Bahamian economy”.

Moody’s this week lowered the Bahamas government’s sovereign credit rating one notch, from Baa2 to Baa3 and changed the outlook to stable. The rating actions concluded a review for downgrade that began on July 1.

Why the downgrade?

Moody’s gave two reasons for the action: Prospects of low medium-term growth which points to weaker economic strength relative to similarly-rated peers; and the persistent increase in the government’s debt ratio, which leaves the Bahamas with less fiscal space relative to rating peers.

Explaining the former, Moody’s highlighted the expectation that the Bahamas’ economic performance over the next five years will likely remain subdued and constrained by structural rigidities.

Moody’s forecasts the economy will recover in 2016-2020, with real GDP growth expected to average 1.3% during this period, the fourth weakest economic performance out of the current 22 Baa-rated sovereigns.

“Structural constraints that limit potential growth include relatively high energy costs, a bureaucratic burden that hinders doing business and labour market rigidities. These constraints are reflected in, for example, the prevalent high rate of unemployment and non-performing loans in the banking system, and have also negatively affected the competitiveness of the tourism sector – a mainstay of the Bahamas’ economy – that accounts directly and indirectly for about 50% of GDP,” it said. “While authorities have implemented some measures to address these issues and have put forward a pro-growth reform agenda via the National Development Plan, progress has been slow so far.”

Given those issues, Moody’s said it considered that the Bahamas’ economic strength will remain “low” – the lowest score among Baa-rated sovereigns which have an average score of “moderate”.

On the debt issue, Moody’s noted that while government has reduced the fiscal deficit for three consecutive years, the government debt to GDP ratio continued to rise to an estimated 66.1% by the end of 2015/16, from 60.2% in 2013/14.

The government’s medium-term plan forecasts continued deficit reduction and a balanced budget by 2018/19 on the back of strong revenue growth and a reduction of expenditures in real terms after 2016/17. According to the authorities this will lead to a reduction in the government’s debt/GDP ratio, closer to 60% of GDP.

However, Moody’s baseline, which incorporates a more gradual fiscal consolidation path, forecasts that the debt/GDP ratio will peak in 2016/17 at about 67% and then stabilize around 65%.

Government responds

In a statement issued on the heels of the downgrade, the Bahamas government said its perspective on the economy remains positive and promised it would continue pursuing the necessary policy reform measures and initiatives to secure durable growth, broadened employment opportunities, and greater fiscal sustainability with debt reduction.

“To this end, the Government is moving swiftly to advance the many real sector initiatives underway that are poised to deliver, over the near-term horizon, further concrete, measurable contributions in these key economic policy areas,” it said, pointing to the mega Baha Mar project which will resume next month.

The administration insisted that fiscal sustainability and debt reduction remain high on its policy agenda.

“The government’s opinion is that The Bahamas’ economic fundamentals still support a strong creditworthiness assessment and, based on its proactive approach to addressing existing policy concerns, is confident that this rating outcome is temporary and an improvement will be secured in the short-term,” it said.

Moody’s has indicated the rating could go back up with a strengthening of budgetary processes, including expenditure controls and improvements in revenue collections that lead to a rapid deficit reduction. It said an improvement in ratings could also materialize if implementation of structural reforms fostered higher potential growth and contributed to a significant improvement in the Bahamas’ debt metrics.

On the other hand, it said if government’s commitment to fiscal discipline diminishes, delaying the stabilization of debt metrics, or if there is a slower than anticipated economic growth – particularly if it lowered government revenue growth, a key component of the deficit reduction strategy – the rating could be further downgraded.

 

Source:
Caribbean360
Sunday August 28, 2016

http://www.caribbean360.com/business/bahamas-gets-rating-downgrade-government-not-losing-sleep