The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas’ ‘junk’ downgrade has drawn sympathy from a religious development coalition, which says this nation’s fate highlights the need for structured processes to resolve “financial crises”.

Jubilee USA, in a statement entitled ‘Bahamas: Another victim of Caribbean debt crisis, described this nation as “the latest small island” to be challenged by debt in the wake of Standard & Poor’s stripping it of ‘investment grade’ creditworthiness.

“Caribbean islands are at the forefront of an escalating global debt crisis,” said Eric LeCompte, executive director of Jubilee USA.

“Frequent hurricanes, unpredictable tourism revenues, high poverty levels and unsustainable debt levels make up a recipe for financial crisis.

“The Bahamas is another Caribbean example for why we need processes to resolve financial crisis. The Bahamas is the latest small island to face these challenges, but it won’t be the last.”

Jubilee USA added that the Bahamas’ public debt has risen by 30 per cent in the past four years, while its poverty rate increased by one-third over the past 15 years.

Mr LeCompte, who serves on United Nations groups on debt and finance, is said to have worked with religious leaders to solve debt crises on several Caribbean islands, including Grenada and Puerto Rico.

Jubilee USA added that while many Caribbean nations were at ‘high risk’ of debt crisis, only Haiti was classified as ‘low income’ and eligible for traditional debt relief initiatives from international financial institutions.

It pointed out that Grenada’s debt was 94 per cent of the size of its economy, while its poverty rate is 37 per cent. Grenada’s religious leaders, Jubilee USA and regional partners won more than $100 million in debt relief in 2015 restructuring agreements between Grenada’s government and its creditors.

The agreements included a “hurricane clause” to delay debt payments in the event of a major storm. Consecutive hurricanes in 2004-2005 caused damage equal to twice the size of Grenada’s economy.

The ‘junk’ downgrade, and loss of ‘investment grade’ status, is potentially highly damaging for the Bahamas and its reputation for economic stability, as it signals to the international capital markets that this nation’s creditworthiness (the Government’s ability to pay its debts) is slipping into dangerous territory.

The Government will likely have to pay more for current and future debt issues, raising its debt servicing (interest) costs. The S&P action thus threatens to trigger an increase in the annual Budget sums that the Government must allocate to pay interest and principal redemptions on its debt - something that is already costing taxpayers more than $500 million per year.

The added debt servicing costs would suck money away from areas such as national security (Police and Defence Force), social security, education and health, impacting the quality of life for the ‘average’ Bahamian.

The ‘junk’ downgrade may also deter investors assessing the Bahamas as a place to invest, as it raises questions about the Government’s economic management.

The S&P downgrade to ‘junk’ status is likely to further exacerbate the uncertainty gripping many Bahamian businesses as the country heads into the pre-general election build-up - a time when locally-owned companies traditionally hold back on growth and investment projects.

S&P justified the downgrade to BB+ (speculative or “junk” grade) from BBB- (investment grade) on the basis that it is now projecting the Bahamian economy will only grow by 0.3 per cent this year, down from its 1.2 per cent estimate in April.

The rating agency added that lower Gross Domestic Product (GDP)/economic growth would also negatively impact the Government’s tax revenues and fiscal consolidation plans, which were already progressing more slowly than expected.

Echoing the International Monetary Fund’s (IMF) recent warnings, S&P said government spending was still outpacing revenues despite the introduction of Value-Added Tax (VAT), with Hurricane Matthew restoration costs set to inflict “further pressure” on expenditure in 2017.

“At the same time, we believe that this lower growth trend will challenge the government’s ability to meet its fiscal projections, likely resulting in rising debt,” S&P said. “The erosion of the Bahamas’ creditworthiness reflects these growing vulnerabilities within a context of a weak external position with growing levels of external debt, double-digit unemployment, high non-performing loans in the banking system, and high household indebtedness.”

S&P added that Baha Mar was unable to come to the Bahamas’ rescue in time to avoid a downgrade, effectively dismissing the $3.5 billion development’s economic impact for much of 2017. “The country’s largest tourism project, Baha Mar, is set to open in phases beginning in 2017. We believe that it will take time before the resort is able to operate at full capacity,” the rating agency added.