The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas will remain locked into low 1-1.5 per cent economic growth rates unless the Government tackles “several structural rigidities” such as high energy costs, Moody’s warned yesterday.

The rating agency, in its half-yearly assessment of the Bahamas’ sovereign creditworthiness, praised the Government for initiating energy sector reforms via the Bahamas Electricity Corporation (BEC) management contract with PowerSecure, but said similar reforms were needed in other areas.

It specifically targeted “the bureaucratic burden” that inhibits the so-called ‘ease of doing business’ in the Bahamas, warning that this nation would continue to suffer high unemployment/low economic growth unless its competitiveness improved.

“The Bahamas’ potential growth rate will remain at this relatively low level unless several structural rigidities, including the efficiency of the energy sector, high levels of unemployment and a bureaucratic burden that thwarts ‘ease-of-doing business’, are addressed,” Moody’s said.

“The Government has started to tackle some of the problems in the energy sector by selecting a private US company, PowerSecure, to manage the state-owned BEC, which would be tasked with increasing efficiencies while lowering costs.

“Additionally, potential changes to the regulatory framework, including having the Utilities Regulation and Competition Authority (URCA) oversee the energy sector, could open up the industry to more private sector players, thus increasing competition and investment,” it added.

“Should these changes foster increased efficiencies in energy generation in the Bahamas, the islands’ competitiveness would improve, especially for the tourism sector, since electricity accounts for a relatively high portion of costs in the industry.”

Outlining what will happen if the economic ‘status quo’ remains, Moody’s said the Bahamas’ “below-trend growth performance” continued during 2015.

“Despite gains in tourist arrivals - stay-over arrivals rose 4.5 per cent in the first 10 months of 2015 - we estimate that output likely expanded at the lower end of 1-1.5 per cent last year,” the rating agency said.

Although it had expected Baha Mar’s now-postponed opening to drive 2 per cent growth in 2016, Moody’s said yesterday: “We now expect that growth in 2016 will continue to recover as tourism flows from the US, in particular, rise, likely reaching 1.5 per cent.

“Other factors supporting economic activity in the Bahamas are mainly related to further foreign investment in the tourism sector and associated increases in employment.

“If the opening of Baha Mar is pushed to late 2016 or sometime in 2017, this will boost growth closer to 2 per cent next year. Yet we forecast that after the initial boost, growth would likely converge again with the Bahamas’ 1.5 per cent potential growth rate.”

Moody’s gave the Bahamas a low’ economic strength rating, with this nation’s high per capita income levels “offset” by this country’s small size, lack of diversification and “weak growth dynamics”.

It did, though, give this nation high marks for ‘institutional strength’, based on the Bahamas’ scores on Worldwide Governance Indicators.

These place this nation’s “government effectiveness, rule of law, control of corruption and other dimensions of institutional quality in or around the 70th percentile among sovereigns that we rate.

“These scores are much higher than ‘Baa’ category medians, outperforming them in all aspects except for regulatory quality, and reaffirming that the Bahamas’ strong institutional framework provides key support for the country’s ratings,” Moody’s added.

“In addition, we think the Central Bank of the Bahamas’ policy credibility is high, which supports confidence in the currency peg to the US dollar and contributes to maintaining macroeconomic stability.”

When it came to improvements in the Bahamas’ ‘Baa2’ sovereign credit rating, which is two notches above so-called ‘junk’ status, Moody’s said everything hinges on improved economic growth and fiscal consolidation.

“Given the significant deterioration in fiscal strength experienced by the Government of the Bahamas, upward ratings momentum would only emerge should its debt metrics fall to levels close to those of similarly rated peers,” the rating agency emphasised.

“A reduction of contingent liabilities stemming from loss-making public sector corporations would also be credit positive.”

As for a downgrade, Moody’s added: “Downward pressure on the Bahamas’ rating could arise if the economy underperformed and negatively impacted government revenues, thus complicating the fiscal consolidation process.

“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.”

Moody’s, though, hinted that a downgrade for the Bahamas - at least by itself - is unlikely in the short-term.

“The stable outlook reflects Moody’s expectation that the medium-term fiscal consolidation plan will contain the Government’s debt burden in fiscal 2015-2016, and afterwards lead to a gradual reduction in the debt-to-GDP ratio,” it added.

“The rating outlook also envisages that real GDP growth will strengthen somewhat after 2015.”