By NEIL HARTNELL
Tribune Business Editor
THE Bahamas’ sovereign credit rating was yesterday cut to just two notches above “junk” status, as a leading Wall Street agency reacted to this nation’s “subdued economic growth” and continued fiscal weakness.
Adding to the fiscal reform impetus, Moody’s slashed the Government’s “issuer” and “unsecured” credit ratings by one place, from Baa1 to Baa2.
But, on the positive side, it effectively gave a “vote of confidence” in the Government’s Value-Added Tax (VAT) and fiscal reform plans, citing an expected improvement in the Government’s finances as the reason for upgrading its outlook on the Bahamas from “negative” to “stable”.
However, the latest downgrade is merely another signal that the Bahamas cannot afford to delay on fiscal and tax reform, and that it must execute properly to hit the targeted fiscal deficit/national debt reductions it is ultimately projecting.
And Moody’s action yesterday reinforces that the outside world, especially investors and the international capital markets, are watching the Christie administration’s progress and actions closely.
Explaining the rationale for the downgrade to Baa2, which brings its Bahamas’ sovereign rating into line with its fellow rating agency, Standard & Poor’s (S&P), Moody’s said “key drivers” were the continued deterioration in the Government’s financial position and the weak economic growth that had exacerbated this.
It added that the Bahamas’ “debt and interest burdens that now exceed those of most Baa-rated peers”.
“The first key driver for today’s rating action is related to the weakening of the Bahamian government’s fiscal strength, as reflected by the significant increase in the sovereign’s debt and interest burdens,” Moody’s said.
“The Government’s debt-to-GDP ratio has increased from 31.7 per cent in 2007 to 59 per cent in 2013, and Moody’s expects it to peak in 2015. At this level, it is almost 20 percentage points above the median for Baa-rated sovereigns (39.5 per cent in 2013).”
Moody’s added that interest (debt servicing) payments now consumed 14 per cent of government revenues, compared to 9.3 per cent in 2007, leaving it with little room to deal with unexpected fiscal or economic shocks in the future.
“The second key driver is the weak economic recovery,” Moody’s said. “Following a recession in 2008-2009, the Bahamian economy has averaged annual growth of just 1.1 per cent in the four years through 2013.
“The economy’s underperformance has negatively affected government revenues, and it has also led to higher current and capital expenditures by the Government in order to support the economy.
“As a consequence, the fiscal deficit widened to 6.3 per cent of GDP in fiscal 2012-2013. While Moody’s estimates that the deficit narrowed to 5.4 per cent in fiscal 2013-2014, this shortfall is still more than double the median for similarly rated peers.”
The upshot of all this is that the Bahamas’ credit worthiness has taken a further hit, and this will further increase this nation’s borrowing (interest rate) costs in the international capital markets.
This increasing burden will also suck more money away from essential public services in the Bahamas, while the downgrade is also not a signal that this nation wants to send to existing and potential foreign investors – due to the questions raised about fiscal prudence.
The Government’s US consultants on fiscal reform warned that further downgrades could “increase the risk of a more dramatic cutoff from external financing.”
Compass Lexecon, in its May 2014 report, said: “While the Bahamas does have credibility based on its history, there is a danger of that dissipating, and the Bahamas should take action not just to put forward a plan to achieve long-term fiscal sustainability, but also to do what it can to bolster the credibility of that plan.”
But Moody’s was yesterday more positive on the Bahamas’ medium and long-term fiscal and economic growth prospects, as shown by its upgraded “outlook”.
“The stable outlook reflects Moody’s expectation that the medium-term fiscal consolidation plan will contain the government’s debt burden in fiscal 2015, and afterwards lead to a gradual reduction in the debt-to-GDP ratio,” the rating agency said.
“The rating outlook also envisages that real GDP growth will strengthen somewhat to 2-2.5 per cent in 2015, owing in large part to the ongoing recovery in economic growth in the US, which is closely correlated with tourist arrivals in the Bahamas.
“Key elements of the fiscal stabilisation plan include expenditure controls that seek to increase the efficiency of public spending. In addition, government intends to introduce a 7.5 per cent VAT in 2015.
“Nonetheless, even with an effective implementation of fiscal reforms, the Bahamas’ debt and interest burdens will remain at levels significantly weaker than most Baa rating peers over the next two years at least, and over the medium term as well.”
In response to the Moody’s action, the Ministry of Finance last night stressed that the Bahamas had retained its investment grade rating, and talked up the improved outlook.
“The ratings agency rightly expresses confidence that the current programme of reforms to boost revenues, and to control expenditure and increase the efficiency of spending, will yield positive results,” the Ministry said.
“These reforms are indeed expected to have the intended outcome of reducing the deficit and supporting a ‘gradual reduction’ in the Government’s debt burden over the coming years.
“As Moody’s expectations underscore, on this course of action the Bahamian economy should strengthen, despite worries to the contrary in some quarters about the merits of the fiscal plan. The Government of the Bahamas must persevere with these reforms.”
Moody’s said the Bahamas’ debt and fiscal ratios would have to improve and come into line with Baa-rated peers for its credit rating to improve, with a reduction in “contingent liabilities stemming from loss-making public sector corporations” such as Bahamasair and the Water & Sewerage Corporation also cited as a positive.
“Downward pressure on the Bahamas’ rating could arise if the economy underperformed and negatively impacted government revenues, thus complicating the fiscal consolidation process,” Moody’s added.
“An expansion of public spending that would hinder consolidation efforts would also be credit negative. In addition, the crystallisation of contingent liabilities from debt held by public sector corporations that required government intervention would result in a loss of creditworthiness for the sovereign.”