The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas faces “at least” a 50 per cent chance of a sovereign credit rating downgrade within the next 90 days, after Standard & Poor’s (S&P) last night placed this nation on ‘negative creditwatch’ due to Baha Mar’s Chapter 11 filing.

The credit rating agency warned that there was a possibility the Bahamas could lose its ‘investment grade’ status, suggesting it could lower this nation’s rating “by one or more notches” if there is either a “prolonged delay” to open Baha Mar or it fails.

A cut by two notches or more would reduce the Bahamas’ sovereign credit rating to ‘junk’ status, damaging this nation’s credibility in the eyes of both global investors and the international capital markets, the latter of which would almost certainly demand higher interest (borrowing) rates.

And S&P warned that if Baha Mar (the Izmirlians) and its Chinese partners were unable to resolve their differences “in the next several weeks”, the reputation of the Bahamas’ tourism industry might be “tarnished”.

“It remains unclear when Baha Mar will open, or if it will be able to sustain the employment of the more than 2,000 employees already hired,” S&P said last night.

“The CreditWatch placement reflects our view that the Baha Mar developer’s Chapter 11 reorganisation filing could result in a prolonged delay in the opening of the $3.5 billion Baha Mar resort, the biggest in the Bahamas’ history.

“A delay, in turn, could weaken the image of the Bahamas’ tourism brand and lead to lower economic growth,” the agency added.

“In our opinion, if the parties do not come to an agreement in the next several weeks, there are risks that not only will Baha Mar be unable to open in the near future, but that if and when it does open, it will not receive the amount of visitors it initially expected, thus tarnishing the reputation of the Bahamas’ tourism industry, which represents more than 50 per cent of the Bahamas’ GDP.”

S&P added that failure to resolve the stand-off with the China Export-Import Bank and China Construction America within the “next couple of weeks” timeframe would result in 2,000 Baha Mar staff losing their jobs.

This, it warned, would further exacerbate the Bahamas’ already high unemployment rate of 15.7 per cent, coming at a time when there was “growing external pressures on the Bahamas”.

“Net foreign direct investment has continued to decline, and it financed a mere 14 per cent of the current account deficit in 2014, compared with more than 50 per cent in 2011,” S&P said.

“The potential further delay in the opening of Baha Mar may also have negative implications for the Bahamas’ external accounts, possibly limiting the boost that the tourism offering was expected to contribute to the country’s exports.”

S&P said it had already cut its real GDP growth forecast for the Bahamas in 2015 from 2.5 per cent to 1.7 per cent, based on Baha Mar’s delayed opening. Further slashes were likely depending on whether a resolution to the project’s woes was forthcoming in the next few weeks.

This comes after GDP per capita in the Bahamas grew by less than 1 per cent over the past decade, and S&P added: “Construction associated with tourism investment projects (namely Baha Mar) did not support headline growth as much as expected given the large foreign labour component in construction.”

About the only good news for the Government and wider Bahamas in S&P’s assessment was its ‘thumbs up’ for the success on fiscal consolidation and Value-Added Tax (VAT).

The rating agency said initial estimates for the January-June period showed VAT generated $150 million in net new revenues, a sum equivalent to 1.7 per cent of GDP.

“This puts it on track to collect new net revenues of $300 million during the first full year it is implemented, which we expect to represent more than 3 per cent of GDP - the Government’s initial goal,” S&P said.

“The execution of the VAT reform represents a significant political and economic effort, and demonstrates progress on the Progressive Liberal Party (PLP) government’s fiscal consolidation efforts.”

S&P said it would either keep the Bahamas on ‘creditwatch’ after the next three months, or remove it and raise/lower this nation’s sovereign rating.

“We could affirm our ratings on thee Bahamas if Baha Mar is able to resume construction and open soon, thereby limiting the negative impact on the country’s economy,” S&P said.

“Such a scenario would imply that we conclude that the recent reorganisation filing will impose minimal damage to the country’s market, its long-term growth prospects and external accounts, and the reputation of its tourism sector.”

Yet it warned: “Conversely, we could lower our ratings on the Bahamas by one or more notches if we believe there will be a prolonged delay in reopening the resort, or if the project fails.

“The resulting damage to the Bahamas’ financial profile, including a potential erosion of its external liquidity due to lower-than-expected tourism exports, would weaken its creditworthiness.”

VAT and fiscal consolidation also weigh heavily in both scenarios.

In response, the Government said it had “noted” S&P”s analysis. It reiterated previous pledges to work to open Baha Mar as rapidly as possible, and took the plaudits on VAT.

“In the meantime, it should be noted that medium-term growth prospects for tourism are also grounded in capacity being added at other resorts in New Providence, Grand Bahama, Bimini, Abaco, and in significant investments other Family Islands,” the Ministry said.

“The quality and reputation of these resorts are anchored in international brands that will remain strong and continue to attract visitor growth.”