By NEIL HARTNELL
Tribune Business Editor
The economic boost from Hurricane Dorian recovery “could be limited” by the 60 percent of Bahamian households who failed to fully insure, a global credit rating agency has warned.
Moody’s, in an assessment that underlined how the category five storm has fully exposed this nation’s vulnerability to climate change, said “the vast majority of low income households” impacted will struggle to rebuild their lives due to the absence of insurance coverage and limited to non-existent savings.
Warning that this could put further pressure on the government’s already-strained finances, Moody’s nevertheless suggested that the Minnis administration was in “a better position” to deal with the fall-out from Dorian.
Besides the $100m emergency credit facility put in place with the Inter-American Development Bank (IDB), The Bahamas will also receive almost $11m from the Caribbean Catastrophe Risk Insurance Facility (CCRIF). That payment, which some are likely to dismiss as insignificant, was confirmed last week.
Acknowledging that The Bahamas’ economic growth will “take a hit” from Dorian, Moody’s added that 76 percent of tourism arrivals to this nation will be unaffected because New Providence - where the majority of the country’s assets are located - was spared the storm’s direct impact.
But, while predicting that Dorian will have little impact on The Bahamas’ debt-to-GDP ratio, the rating agency estimated that the storm’s impact will be greater than the $588m worth of loss and damages - a sum equal to 4.9 percent of GDP - inflicted by Hurricane Matthew in October 2016.
“While reconstruction could provide a small boost to growth next year, the recovery could be limited by relatively low insurance penetration in the country,” Moody’s warned. “According to the IMF, approximately 60 percent of households are without insurance or are underinsured.
“While tourism-related infrastructure is likely covered by insurance, the vast majority of low income households affected by Dorian will likely struggle to rebuild. This, in turn, could affect the sovereign’s finances should the Government provide tax exemptions on reconstruction materials or other types of financial support.”
Despite the widened deficit for 2019-2020, which will likely result from the Dorian-related reduction in revenues and rise in disaster relief spending, Moody’s is forecasting little change in The Bahamas’ debt-to-GDP ratio.
“Historically, the Government has responded ex-post to natural disasters by re-prioritising spending and/or widening the fiscal deficit, which resulted in an increase in the debt burden,” it added.
“More recently, however, the Government has taken steps to create buffers (comprised of a natural disaster fund, a contingent credit line, and disaster insurance) to mitigate the fiscal cost of future hurricanes as well as increase its physical resilience.
“Moreover, recent improvements in government finances also better position the sovereign to deal with the aftermath of this latest hurricane,” Moody’s continued. “Preliminary figures showed that the deficit in fiscal 2018-2019 had decreased to 1.7 percent of GDP from 3.4 percent the previous year, meeting the target set by the country’s new fiscal rule (1.8 percent of GDP) and bringing the debt burden to 58.8 percent of GDP.
“Although we expect this event to likely contribute to an increase in government debt, The Bahamas’ debt-to-GDP is likely to remain broadly in line with the 59.6 percent median for its ‘Baa3’ rated peers.”
Moody’s said the $100m IDB credit line and CCRIF payout would help cover the Government’s near-term Dorian response, estimating that the total funding available will be equivalent to between 0.8 percent to 1.2 percent of Bahamian gross domestic product (GDP).
“Economic growth will likely be lower than our previous forecast of 1.8 percent for 2019, although reconstruction efforts could provide a small boost in 2020,” Moody’s said. “We expect the effect to be relatively contained compared to other Caribbean islands’ experiences with other hurricanes.
“Dorian hit the islands of Abaco and Grand Bahama in the north, which together is home to 20 percent of the population and accounted for 12.4 percent of total tourist air arrivals in 2018.
However, New Providence, which is more central and is home to the capital, Nassau, suffered significantly less damage – there were some floods due to the heavy rainfall but the international airport remained open,” the rating agency added.
“New Providence receives the bulk of tourist air arrivals – 76 percent of the total in 2018 - and they stay mainly at the largest resorts on the island, Atlantis and Baha Mar.”
Analysing Dorian’s broader implications, Moody’s said: “This latest hurricane underscores The Bahamas’ exposure to climate change risk, which is driven by the country’s small economic size and the frequency and magnitude of natural disasters.
“Similar to most Caribbean countries, The Bahamas is vulnerable to hurricanes, which is exacerbated by the fact that 72 percent of its land is low-lying or within five metres above sea level. At the same time, the country’s small economic size (with a nominal GDP of $12.4bn in 2018) and concentration of economic activity in the tourism sector limit shock absorption capacity.
“That said, the impact of hurricanes varies greatly because The Bahamas comprises over 700 islands that are spread over more than 13,000 square kilometers, with most economic activity – and more developed infrastructure – concentrated in a few islands.”
Moody’s continued: “According to the International Monetary Fund (IMF), over the past 30 years the average annual damage of natural disasters in The Bahamas has amounted to approximately 1.5 percent of GDP (encompassing both the private and public sector).
“This is slightly higher than the 1.2 percent average for the Caribbean region. In 2016, Hurricane Matthew – the most recent, preceding example of a hurricane that caused large losses – cost The Bahamas around 4.9 percent of GDP ($588m). Given Dorian’s magnitude, we expect the costs of this hurricane to be higher.”