By NEIL HARTNELL
Tribune Business Editor
The “extraordinary beating” inflicted upon the tourism industry by COVID-19 was critical in Moody’s decision yesterday to strip The Bahamas of its ‘investment grade’ credit rating, the deputy prime minister says.
K Peter Turnquest, responding to the rating agency’s move to slash The Bahamas’ sovereign creditworthiness by two notches to ‘Ba2’, told Tribune Business there was little the Government can do to improve this situation in the short-term given that the priority remains protecting families, businesses and the wider economy against the worst of the pandemic’s fall-out.
Pointing out that The Bahamas was far from alone in suffering downgrades as a result of COVID-19, Mr Turnquest said the Government was still predicting an economic revival will begin in late November 2020 when the Thanksgiving holiday signals the start of the winter tourism season.
He admitted, though, that this forecast could easily be derailed by the multiple “unknowns” surrounding COVID-19 - particularly the timing and strength of the US travel market rebound, given that the country accounts for 82 percent of all visitors to this nation.
“Our economy is affected more than most in that we are so tied to tourism, which has taken an extraordinary beating,” Mr Turnquest told Tribune Business.
“In the eyes of the rating agencies, that increases the risk.
“There is nothing we can really do about that in the interim save we continue to work on alternatives to shore up revenue gaps and further generate economic activity. We are cautiously optimistic we will have a rebound in the second half of the year going into the Thanksgiving holiday.
“By Thanksgiving hopefully we will see some kind of rebound and stabilisation. Our Budget is based around that, and if all things follow there’s going to be pent-up demand. All those persons that wanted to go on vacation, but were forced to hold off, are going to want to take those vacations, so hopefully that will translate into a sharp uptick in activity before things start evening off in the middle of next year.”
The Bahamas has now lost ‘investment grade’ status with both Moody’s and its fellow rating agency, Standard & Poor’s (S&P), with the former’s action yesterday also dropping the country to so-called ‘junk’ status. The consequences include a potential increase in the Government’s borrowing costs when it goes out to raise hundreds of millions of dollars in debt financing later this year to cover its upcoming $1.3bn fiscal deficit.
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.
And the Moody’s downgrade, an action that has been flagged by the rating agency since April 9 this year, could also impact foreign direct investment (FDI) levels as investors in that area will have to factor the increased country and fiscal risks into their decisions as to whether to deploy capital.
Moody’s, in its rationale for the “two notch” downgrade and “negative outlook” placed on The Bahamas, forecast that this nation’s economy will shrink by between 16 percent and 20 percent during 2020. This is equivalent to a gross domestic product (GDP) loss of around $2bn, further highlighting the immense damage and suffering caused by the combination of COVID-19 and Hurricane Dorian.
Moody’s GDP projections are now in line with those of both S&P and the Prime Minister, although they are slightly worse than the Government and Central Bank forecast of a 12 percent economic shrinkage. And, with the Government undertaking huge borrowings to prevent the economy’s collapse, Moody’s is now forecasting that The Bahamas’ debt-to-GDP ratio will jump by 25 percentage points within two years.
The rating agency said yesterday it believes that The Bahamas’ debt burden will soar from 60 percent of GDP in June 2019 to equal 85 percent of economic output by the end of the upcoming fiscal year in June 2021, meaning that the country’s liabilities will not be far off from matching the economy’s size.
And, with the COVID-19 pandemic predicted to cost the Government some $900m in revenue, Moody’s said its debt servicing costs will increase to 22.6 percent of its $1.7bn revenues in 2020-2021 compared to just 13.5 percent in the 2018-2019 fiscal year. This means that the Government’s interest bill will be greater than one-fifth of its income, or more than one out of every five dollars it takes in.
Forecasting that the Government’s total borrowing needs for 2020-2021 will match the size of the economy’s contraction, standing at 17 percent of GDP, Moody’s nevertheless provided a few minor glimpses of optimism for The Bahamas amid the country’s projected loss of over 50 percent of tourism inflows.
For it suggested that The Bahamas could recover half of its lost economic output in 2021 if tourism business volumes returned to between 60 percent and 70 percent of their 2019 levels. And Moody’s also noted that the Government’s debt costs had somewhat stabilised, with yields on its foreign currency bonds due to mature in 2028 dropping from 11.6 percent at COVID-19’s May peak to around 8.2 percent currently.
“The main driver for the downgrade is the significant negative effect the coronavirus outbreak will have on The Bahamas’ economic and fiscal metrics,” Moody’s explained. “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.
“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.” While noting The Bahamas’ plans to open its borders and relaunch the tourism industry on July 1, Moody’s pointed to the continuing uncertainty over the cruise industry’s return, which has now been postponed until September 15 at the earliest.
It also noted that the likes of Baha Mar, Sandals Royal Bahamian and Club Med’s San Salvador resort have all delayed their re-openings until the 2020 fourth quarter. Tribune Business reported exclusively more than a week ago that Baha Mar plans to terminate between 15 percent to 20 percent of its workforce, a move that could make up to 1,100 persons jobless.
“Given these dynamics, Moody’s expects a loss of over 50 percent of tourism flows in 2020 relative to 2019, which would lead to a GDP contraction of about 16 percent to 20 percent,” the rating agency said. “Moody’s believes that the recovery of the global tourism sector is exposed to potential changes to consumer behaviour following the coronavirus outbreak.
“The performance of the sector will also depend on the speed of the recovery of the airline industry and ability to service tourist destinations such as The Bahamas. That said, a recovery in 2021 to 60 percent to 70 percent of 2019 tourism flows could lead to a GDP expansion of over 10 percent in The Bahamas.”
However, Moody’s warned that The Bahamas’ medium-term economic performance will remain “subdued” even if there was a strong tourism rebound due to its failure to tackle long-standing structural weaknesses such as “weak credit growth, high energy costs and weak ease of doing business”.
Acknowledging the record fiscal deficit projected for next year, Moody’s added: “The Bahamas’ debt burden will reach 85 percent of GDP by June 2021, from 60 percent in June 2019. Additionally, the government’s debt affordability will deteriorate as a consequence of higher interest payments and the loss of revenue, which will push the interest-to-revenue ratio to 22.6 percent in 2020-2021 from 13.5 percent in 20182019.
“Moody’s expects the ratio to decline somewhat in subsequent years as government revenue recovers. Overall, The Bahamas’ fiscal strength will materially weaken relative to its prior Baa-rated peers.” Acknowledging the improvements made by the Minnis administration in fiscal policy credibility and effectiveness, the rating agency warned that its limited fiscal headroom could translate into “heightened government and external liquidity pressures should market access become more constrained”.
With debt servicing costs also set to rise when the Government seeks foreign currency financing to bolster the external reserves during the upcoming 2020-2021 fiscal year, Moody’s said: “Following the intensification of the coronavirus crisis in March 2020, The Bahamas’ sovereign bond spreads widened significantly.
“The yield on its 2028 global bond reached 11.6% percent in May but has since stabilised around 8.2 percent. Even at this lower level, The Bahamas’ bond yields are still higher than historical levels of around 6 percent. This points to more constrained market access and, should these bond spreads remain at these levels, it would increase government liquidity risks and place additional pressure on debt affordability metrics.
“Moody’s forecasts government borrowing needs will exceed 17 percent of GDP in 2020-2021, above historical levels of about 7 percent of GDP. About 5 percent of GDP corresponds to principal repayments, most of which are due to reliable domestic sources. Moreover, because of the loss in tourism flows, The Bahamas’ external accounts will deteriorate in 2020 and lead to a reduction in its foreign exchange reserves.”
Moody’s added that The Bahamas faces further fiscal and economic pressures due to the annual threat of hurricanes, while the COVID-19 fall-out was set to “weigh significantly” on higher unemployment levels and further strain the Public Treasury.
“Given the severity of the crisis, downside risks to the credit profile will remain over the next two years. There is still significant uncertainty about the strength and speed of the recovery of the global tourism sector,” the rating agency warned.
“If, in particular, the recovery in 2021 is weaker than Moody’s expects, this would put additional pressure on government revenue and further erode the Government’s fiscal strength. Moody’s also considers that prospects for debt stabilisation are highly susceptible to economic performance in 2021 and 2022.
“There is also a risk that market sentiment towards The Bahamas does not improve enough to enable the Government to finance its larger funding needs through 2021-2022. While the favourable [debt] maturity profile mitigates some risks related to government liquidity (the next global bond is not due for repayment until 2024), limited market access could create external liquidity pressures.”