The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas still has “the highest” sovereign credit rating in the Caribbean despite Wall Street’s ‘negative’ outlook on the Government’s finances, a leading analyst yesterday saying this nation was performing well “in a global context”.

Edward Al-Hussainy, the Moody’s analyst who covers the Bahamas and its sovereign rating, told Tribune Business that the agency’s ‘A-3’ rating on this nation was still “pretty high”, placing the country in the same bracket as Malaysia and South Africa.

While acknowledging that the Bahamas’ debt ratios had “deteriorated slightly” since Moody’s placed it on a ‘negative’ outlook last year, Mr Al-Hussainy acknowledged that fiscal weakness was counterbalanced - to some extent - by economic growth prospects.

The International Monetary Fund (IMF) was projecting GDP growth of 2.5 per cent for this year and 2013, but Mr Al-Hussainy said the Bahamas’ narrow tax base meant fiscal recovery was likely to lag other nations.

Standard & Poor’s (S&P), Moody’s fellow credit rating agency, on Monday night came into line with its counterpart by slashing its economic outlook for the Bahamas from ‘stable’ to ‘negative’.

This indicates the risks facing the Bahamas, and the public finances, are weighted towards the downside, and is another warning that the Government must act immediately to get its fiscal house in order.

While Moody’s seems unlikely to take any further action - including a rating downgrade - of its own for now, Mr Al-Hussainy indicated it is closely scrutinising the Bahamas’ fiscal position.

He is due to visit the Bahamas in October/November for meetings with the Government and key private sector stakeholders, a precursor to Moody’s writing an updated country report on this nation.

“We had put the Bahamas on a negative outlook almost a year ago,” Mr Al-Hussainy recalled.

“The rating is ‘A-3’, but still, to put it in a global context, South Africa and Malaysia are rated ‘A-3’.

“It’s a very solid rating, the highest in the Caribbean at the moment. It is a pretty high credit rating, and if put in a global context the Bahamas is doing quite well.

“But we do have a negative outlook, and since we put the negative outlook in place some of the debt metrics have definitely deteriorated slightly, and the level of debt-to-GDP has risen significantly.”

While reluctant to say that the ‘negative’ outlook meant there was “a one-in-three” chance of Moody’s taking further action, such as a downgrade to the Bahamas’ sovereign credit rating, Mr Al-Hussainy acknowledged the position meant the rating agency was “taking a closer look at the Government’s finances” to see if further action was warranted.

“We’ve had a negative outlook for a while, and at some point this year we will review the rating,” he said.

However, Mr Al-Hussainy said the fiscal position was mitigated “somewhat” by the Bahamas’ current economic growth, and prospects for future expansion.

“The growth has been a relatively positive development in the Bahamas,” he told Tribune Business.

“It’s on track to grow over 2 per cent this year; the IMF is predicting 2.5 per cent which, in the context of what is happening in the rest of the Caribbean, is a very positive development.”

While tourism, particularly at the market’s top end, was showing signs of recovery, Mr Al-Hussainy said any improvement would take time to filter into the Government’s finances.

“The Government’s revenue base is pretty narrow, so it’s not able to extract as much revenue as some of the other countries in the region,” he told Tribune Business.

“When it translates into fiscal improvement, there’s more of a time lag in the Bahamas.”

This refers to the fact that despite being a services-based economy, the Bahamas hardly taxes this sector, with the burden largely falling on imported goods, real estate and other sectors.

Although S&P had called for the Government to come up with a credible medium-term plan to tackle the $550 million deficit, plus $4.5 billion national debt, Mr Al-Hussainy was more sceptical about setting these targets.

Suggesting that many governments failed to stick to such plans, he added that it was difficult to assess “how much weight” to give them.

For Moody’s, Mr Al-Hussainy said the key factors were the Government’s revenue and spending plans, coupled with likely economic growth.

Also critical is the composition of the Government’s debt, namely what proportions are held by Bahamian and foreign investors; how much is denominated in foreign currency; and the interest rate/debt servicing costs being paid on this debt.

“I can’t speak to where the rating is going to go,” Mr Al-Hussainy said. “We’ll have to wait and see.”

He added that it was rare for “a sharp breaking point”, where a rating agency said ‘if this happens, there’ll be a downgrade’, to occur.

More often, “it’s a continual slide in the Government’s finances that causes us to take a closer look and say: ‘We can’t keep it at this rating’.”Mr Al-Hussainy explained.

The Bahamas has seen just such a slide.