The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Baha Mar will “only start weighing” on the Bahamas’ creditworthiness should it remain unopened by the 2016 second half, something that would prompt Moody’s to slash next year’s GDP growth forecast by up to a full percentage point.

The credit rating agency yesterday gave the Bahamas, and the Christie administration, a break by maintaining its existing rating and outlook on the Bahamas’ sovereign creditworthiness, declining to follow Standard & Poor’s (S&P) down the ‘downgrade’ path.

Moody’s, having downgraded the Bahamas itself last year, has effectively chosen to “take the long view” and adopt a ‘wait and see’ approach to how the Baha Mar dispute plays out and its impact on the economy.

Renzo Merino, Moody’s country analyst for the Bahamas, yesterday told Tribune Business that this nation was enjoying improved fiscal and economic growth prospects without Baha Mar.

Tourism numbers were up for properties such as Atlantis, he added, while Value-Added Tax (VAT) was performing better than projections and helping to ensure the Government was ahead of target on its fiscal consolidation plan.

Moody’s, though, acknowledged that the Baha Mar legal battle, in particular the Government’s petition to wind-up the project, had “raised concerns regarding the Bahamas’ dispute resolution mechanisms and the ease of doing business in the country”.

While this had yet to become a major deterrent to other existing, and potential, investment projects, Moody’s also conceded that Baha Mar would not now open in time for the 2015 Christmas tourism season.

And it could miss the peak winter 2016 tourism season, with the credit rating agency pushing back its opening estimates to the “first half” of next year. It, though, believes construction completion will occur by summer next year.

Moody’s said the dispute between Baha Mar and its Chinese partners “has already postponed the opening until, at the earliest, the first half of 2016.

“Our baseline is that a resolution to the dispute will be achieved and the project will most likely be completed before the summer of 2016,” it added.

“However, owing to the delay we have already reduced our estimate of economic growth in 2015 to 1.7 per cent from 2.2 per cent. Further postponement will impair economic growth next year and slow the pace of the Government’s fiscal consolidation effort.

“If Baha Mar is fully operational by early 2016, growth could reach 2.5 per cent next year. However, should the current legal dispute further delay the resumption of construction and the opening of the resort into the second half of 2016, which is increasingly likely, we would reduce next year’s growth forecast to 1.5-2 per cent.”

That means Moody’s would slash a full percentage point, equivalent to roughly $80 million, off the Bahamas’ 2016 GDP growth forecast should the worst case scenario happen.

Mr Merino, though, justified Moody’s decision to maintain its existing rating and outlook on the Bahamas’ sovereign credit rating by pointing out that fiscal and growth improvements were already occurring without Baha Mar.

“We see Baha Mar as a positive once it opens,” he told Tribune Business. “It will only start weighing on the rating if there’s a really protracted delay, and that starts affecting investment in other projects and, in our view, the fiscal consolidation.”

Pressed by Tribune Business as to whether he meant that this “weighing” would start in the 2016 second half, Mr Merino responded: ‘Technically, yes. But from now until then, there’s clearly a lot that could happen.”

Still, Moody’s report warned that a “protracted delay” in Baha Mar’s opening would also delay forecast improvements to the Government’s revenues/fiscal position for 2015-2016, and potentially cause a “greater accumulation” of foreign currency debt.

It added that any hit to revenue forecasts would require the Government to make “greater efforts” to reduce its spending. Yet the fiscal consolidation, and deficit reductions, would continue albeit at a slower pace than projected.

“The delay will reduce the anticipated government revenues for the 2015-2016 fiscal year and, if Baha Mar remains unfinished, could weigh on revenues for the fiscal year that will end in June 2017,” Moody’s said.

“Accordingly, the pace of fiscal adjustment would slow and the authorities would need to exert a greater effort to rein in expenditures. Nonetheless, fiscal deficits will continue to narrow, albeit less than the Government’s and our previous expectations.

“The Government expects a deficit of 1.5 per cent of GDP in 2015-2016, while we forecast a deficit of 2.2 per cent during the same period, presuming Baha Mar is completed in the first half of 2016. Although we anticipate, following the completion of Baha Mar, that the government’s debt-to-GDP ratio will decline to slightly above 60 per cent (which still exceeds the 40% median for Baa-rated sovereigns), debt levels will remain relatively stable at around 65 per cent if the project remains unfinished.”

Moody’s added that Baha Mar’s completion would also benefit the Bahamas’ current account position via reduced construction-related imports.

The project’s construction had widened current account deficits since 2011, peaking at in excess of 20 per cent of GDP last year. With foreign direct investment (FDI) inflows unable to cover these deficits, Moody’s said the Bahamas was increasingly having to finance them via foreign currency debt.

“A protracted delay in the opening of the Baha Mar resort will also slow the reduction in the external deficit and lead to a greater accumulation of external debt unless FDI increases,” Moody’s warned.

“Since foreign direct investment (FDI) flows have been insufficient to fund the full current account deficit, the deficit was increasingly financed by debt-generating external capital inflows.

“For this reason, the Bahamas’ external debt-to-GDP ratio rose to 24 per cent in 2014 from 4 per cent in 2007, while external debt-to-current account receipts increased to 54 per cent from 9 per cent during the same period.”

Moody’s also echoed S&P in warning that the Government’s handling of the Baha Mar dispute was almost as important as the outcome, especially when it came to influencing the perceptions of existing and potential investors.

“The ongoing legal quarrel and the possibility that the developers may lose control of the resort through the liquidation process raises concerns regarding the Bahamas’s dispute resolution mechanisms and the ease of doing business in the country,” Moody’s said.

“Although, at the time, we do not foresee risks to most projects, the large scale and high-profile nature of the Baha Mar project may raise concerns for other large FDI projects.”

Tribune Business was yesterday told that two Abaco-based development projects had been put on hold as a result of concerns over the Bahamas’ business climate, due to the Government’s handling of the Baha Mar dispute and associated comments by Cabinet ministers.

Mr Merino yesterday told Tribune Business that it was “hard to tell” whether Baha Mar was impacting the sentiments of other investors.

“The legal dispute is fairly young,” he said. “In the worst case, it would be that other investors start seeing this as something that reflects the whole picture in the Bahamas.

“Our sense is that there’s still a lot of interest from international investors in going in and setting up projects, not just on New Providence but in the Family Islands.”

Moody’s report justified maintaining its ‘Baa2’ credit rating, and stable outlook, on the Bahamas because of the belief that this nation’s economic growth rate and fiscal consolidation trends will continue to improve without Baha Mar.

Yet it warned: “We will reassess our forecasts for growth, balance of payments, and the fiscal accounts based on the outcome of the legal dispute surrounding Baha Mar.

“There will be negative ratings pressure should the legal dispute delay the opening of the resort beyond the second half of 2016, and if there is evidence the stabilisation of the debt trend was at risk either because of fiscal slippage or a large negative shock to growth.”