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Updated: Bahamas Rating Under Review For Downgrade, Says Moody's

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Moody’s has predicted that the Bahamian economy will shrink by 8 percent this year as it put this nation “under review” for a downgrade to so-called “junk” status.

The international credit rating agency, in a move that will come as little surprise, cited the “significant risks” to The Bahamas’ fiscal and economic performance from the COVID-19 pandemic as the rationale for its move.

Its projection that Bahamian GDP will contract by 8 percent this year means that economic output, based on 2018 national accounts data from the Department of Statistics, will shrink by almost $1bn in nominal terms or $861m using the “real” measurement. The latter strips out the impact of inflation on GDP growth figures.

Moody’s action, especially if it follows through with the threatened downgrade, will likely mean that the Government’s borrowing costs will increase should it need to raise capital in the international markets to deal with COVID-19’s economic fall-out.

Many observers believe that the Government will have to go this route to support the foreign currency reserves, which are likely to decline by more than the previously-forecast $900m fall from their $2.03bn end-February 2020 position as this estimate did not factor in a 100 percent tourism shutdown.

The Bahamas’ present ‘Baa3’ rating is the lowest investment grade rating available, and any downgrade will mean that Moody’s has joined S&P in dropping it to so-called ‘junk’ status.

Should this occur, investors will likely seek higher interest rates on Bahamian sovereign debt to compensate for the extra risk due to the Government’s loss of creditworthiness. This, in turn, will lead to higher debt servicing costs that will ultimately have to be paid by the Bahamian taxpayer.

To escape a downgrade, Moody’s said the Government must produce “a credible fiscal and economic policy response” that “efficiently” manages the economic and fiscal risks produced by COVID-19 amid the increased pressures caused by the pandemic.

A “material deterioration” in the country’s economic and fiscal indicators, which is combined with an inadequate medium-term response to get the Government’s debt and deficit performance back on track, would result in the threatened action being taken.

Moody’s, unveiling its review yesterday, said: “The decision to place the ratings on review for downgrade reflects the significant expected decline in economic output in 2020 due to a large shock to the tourism sector.

“Tourism's direct contribution to Bahamian GDP is close to 20 percent of the total, while its indirect contribution through other sectors represents another estimated 20 percent of GDP. As a consequence of the spread of the coronavirus disease, The Bahamas has limited the inflow of visitors, while other countries have also imposed travel bans.

“In particular, travel restrictions from the US (origin of over 80 percent of stopover visitors), as well as Canada and the European Union (origin of 7 percent of stopover visitors each), will lower the inflow of tourists into The Bahamas for several months,” Moody’s added.

“The Government has also imposed movement restrictions within its borders so as to contain the spread of the disease among the local population. These developments will weigh significantly on economic activity during the first half of 2020. Consequently, Moody's now forecasts a contraction in economic activity of about 8 percent this year, compared to an estimate of 0 percent growth previously.”

Moody’s economic contraction estimate is in line with the $1bn loss projected by the Government for the period to end-June 2020. Both forecasts appear to be based on The Bahamas and US bringing COVID-19 under control by the second quarter end.

With the Caribbean Disaster Emergency Management Agency (CDEMA) predicting that up to 40 percent of the Bahamian workforce may become unemployed due to the COVID-19 pandemic, Moody’s agreed that the crisis will “weigh significantly on employment levels in the short term, increasing social needs and therefore pressure on the Government's finances”.

The international credit rating agency acknowledged that the pandemic had hit at the worst possible time given that The Bahamas was still struggling to recover from the economic and fiscal damage inflicted by Hurricane Dorian in early September 2019.

That both reduced the country’s 2019 GDP growth and was forecast to drive the fiscal deficit from an initial $137m, or 1 percent of economic output, to $677.5m or 5.3 percent. That latter forecast, Moody’s added, will have been further endangered by the pandemic.

“Moody's notes that the coronavirus shock… is affecting The Bahamas at a time when economic performance had already been hit by Hurricane Dorian in September 2019,” the rating agency said.

“During the review Moody's will explore the lasting effects these shocks will have upon The Bahamas' economic strength by assessing the effectiveness of containment measures in The Bahamas and other countries, but also any structural shifts in the tourism industry that may result from the pandemic.

“Prospects for the resumption of reconstruction efforts in the islands affected by Hurricane Dorian, as well as new foreign direct investment (FDI) projects in these locations, will also be considered in evaluating the country's medium -term growth potential. Assessing the effect of the ongoing health crisis on the cruise sector will be important, as some key FDI projects in the pipeline are headlined by cruise ship companies.”

As for the fiscal outlook, Moody’s said Hurricane Dorian meant that The Bahamas debt levels were already likely to “stabilize” at a level higher than previously forecast.

“The virus outbreak is compounding the fiscal and debt challenges facing the government,” the rating agency acknowledged.

“The fiscal policy response to the coronavirus and the likely loss in government revenue due to lower economic activity will likely lead to wider deficits in fiscal year 2019-2020 to over 5.5 percent of GDP and more gradual fiscal consolidation in future years.

“This would push The Bahamas's debt metrics higher, further weakening its fiscal strength and widening the gap with its Baa3-rated peers. During the review period Moody's will assess the Government's short-term response to the ongoing shock and its fiscal plans for the next few years as set in the 2020-2021 budget to be tabled in May,” Moody’s added.

“The review will look at the effectiveness of the plan in containing the weakening of the debt metrics and, over the medium term, the country's ability of the country to reduce its debt load.”

On a slightly more positive note, Moody’s added: “The decline in tourism flows will likely lead to a deterioration of the current account balance, although the decrease in oil prices and a likely fall in import demand related to tourism activities will mitigate the widening of the external deficit.

“The central bank's foreign exchange buffers were also at a relatively high level prior to the coronavirus shock, which should also diminish external liquidity pressures.”

Yet, in summing up the bleak near-term economic outlook for The Bahamas, Moody’s concluded: “The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets.

“For The Bahamas the shock mainly transmits through the sharp decline - and potentially prolonged slump - in the tourism industry, which represents a sizable proportion of gross value added in the economy as well as a source of government revenue and export earnings.

“A likely deep economic contraction, combined with higher fiscal deficits, could lead to a permanently higher debt and interest burden that is already elevated relative to ‘Baa3’ peers.”

Ends

Comments

Well_mudda_take_sic 3 months ago

What else is new?! These rating agencies and the unscrupulous greedy lenders they represent will always hit you hardest when you're down and out.

It's all about pushing up interest rates on our already unsustainable foreign currency denominated national debt. And of course this occurs at a time when Minnis and Turnquest are negotiating additional foreign currency borrowings to try stem the rapid bleeding of our country's foreign currency reserves.

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Topdude 3 months ago

This is another example of dummy like Mudda sick putting together catch phrases in an attempt to come across as an intellectual. He could not tell the difference between the multiplier effect and supply and demand during a global recession.

I recommend you take the basic course in Macroeconomic Theory before attempting to trad in avenues where you have no ability to understand. Thanks.

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Well_mudda_take_sic 2 months, 4 weeks ago

I suspect even Paul Samuelson's book would be well above your reading level. ROWL

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BahamasForBahamians 3 months ago

Lets see how the government spins this.

They spared no mercy on the previous administration for downgrades.

Not even for natural disasters and hurricanes.

This pandemic won't excuse them.

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tell_it_like_it_is 3 months ago

This is really stupid! What's the point of reviewing for a downgrade now? At least wait until the world is back up on it's feet first, then examine how we are doing in comparison.

So in reality they need to downgrade the whole world! What a time for Moody's to show their bias! It's not like it's only The Bahamas' economy being affected. Experts everywhere say the whole world is in a temporary recession. smh

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moncurcool 3 months ago

So true. It is clear this ratings agencies with their predatory and mafia lending practices are totally biased in their operations.

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John 3 months ago

Ignore them in the short term. Many lending agencies are anxious to see the world economy rebound and they will loan The Bahamas money at reasonable rates. But the government must exercise restraint and ride on three tires instead of four. At least until you get out of this Corona jungle

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TalRussell 3 months ago

What would be the comrade PopoulacesOrdinary's rating review, if the colony's elected government moved froward with it's rumoured be under review plans for PopoulacesPurse to provide $100 millions dollars in direct/indirect Bailout aid to a preferred group failing local print, radio and television corporate's. Nod once for yeah, twice for no?

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Cobalt 3 months ago

In case Moody hasn’t recognized..... The whole world is currently in junk status.

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BahamaPundit 3 months ago

At some point in the near future the s%#t is going to hit the fan and the Bahamas Government will be flat broke. It can't bail out the private sector for more than a few months and tourism isn't coming back anytime soon. The Bahamas needs to prepare for that time NOW. Food kitchens with beans and rice must be set up to ensure the people don't go hungry. It must construct shelters for all of the new homeless or pass a law preventing evictions. It must figure out how to continue to provide utilities to the penniless. It must find a source of industry and income that all the displaced hotel workers can engage in for profit.

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