By Neil Hartnell
Tribune Business Editor
nhartnell@tribunemedia.net
The scale of the economic and fiscal challenges facing the new Philip Davis-led administration were laid bare Friday, after Moody’s further downgraded the Bahamas’ sovereign creditworthiness.
The credit rating agency, in slashing the country’s long-term issuer and senior unsecured ratings to ‘Ba3’ from ‘Ba2’, warned that the devastation inflicted by COVID-19 and Hurricane Dorian will have “lasting consequences” for the Bahamian economy with stopover arrivals only returning to pre-pandemic numbers in 2024.
This latest action plunges The Bahamas further into non-investment grade or ‘junk’ status, with Moody’s adding that the country’s $10.356bn national debt is now more than six times’ bigger than the Government’s annual income or revenue base.
The consequences of the latest downgrade include a further potential increase in the Government’s borrowing costs when it goes out to raise hundreds of millions of dollars in more debt financing later this year.
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.
The timing of Moody’s actions is especially bad given that the Government’s 2021-2022 borrowing plan projected it would seek to place a $700m bond with the international capital markets in late September/early October, depending on prevailing conditions.
Those conditions have suddenly become much more negative and could force that issue – which was the largest chunk of the Government’s multi-billion borrowing plan – to be delayed or not proceed at all given that lenders may likely demand much greater interest rates – as high as 8-9 percent.
And the downgrade could also hit foreign direct investment (FDI) and associated confidence, as investors will have to factor increased country and fiscal risks into their decisions as to whether to deploy capital on projects in this nation.
The Government appeared to be unaware of the downgrade until contacted by The Tribune this evening. The new Prime Minister’s spokesperson said: “Oh wow, oh wow” when informed, and then added that they were heading off to inform him and seek more information before the call ended.
Many observers are likely to be suspicious about the timing of Moody’s downgrade, coming just one day after the general election and within hours of Mr Davis’ swearing-in as prime minister.
Former Prime Minister Dr Hubert Minnis said during the campaign that his reasons for calling an early election would become obvious soon after. It is unclear whether he was referring to Moody’s impending downgrade, with the rating agency traditionally publishing its annual report on The Bahamas in August.
It broke with that tradition this year, but there is no confirmation that the outgoing government asked Moody’s to delay taking action for fear it would have influenced voters on election day. The rating agency called a meeting to discuss its impending Bahamas’ downgrade on September 14, just two days before the general election.
Moody’s, in maintaining a “negative outlook” on The Bahamas, justified the downgrade by saying: “The downgrade to ‘Ba3’ reflects the significant erosion of The Bahamas' economic and fiscal strength brought on by the coronavirus pandemic.
“Moody's expects the gradual recovery in tourism to leave a long-lasting impact on The Bahamas' credit profile through materially higher debt and interest burdens, which will significantly exceed those of ‘Ba3’-rated peers.”
The rating agency only cut The Bahamas’ sovereign creditworthiness, which measures the Government’s ability to pay its debts and bills, by one notch this time having slashed it by two spots in June 2020.
“The duration and severity of the coronavirus shock has fundamentally weakened The Bahamas' credit profile with lasting consequences in terms of a higher debt burden and weaker debt affordability, as well as reduced economic strength,” Moody’s said.
“Real GDP contracted by 14.5 percent in 2020, with the tourism industry most severely affected by a shutdown that lasted for most of the year. Despite the uptick in tourism activity in recent months, The Bahamas faces prospects of a slow economic recovery, and one that remains vulnerable to potential future variants of the coronavirus. Moody's expects stayover tourist arrivals to return to 2019 levels only by 2024 at the earliest.”
With The Bahamas’ debt and interest repayment burdens higher than other countries rated ‘Ba’ by Moody’s, the rating agency added that the $10.356bn national debt was six times’ higher than the Government’s COVID-reduced revenues at end-June 2021.
“The Bahamas' debt burden was already higher than ‘Ba’-rated peers prior to the pandemic, and will remain above similarly rated peers as the economy recovers only slowly from the pandemic,” Moody’s said. “Fiscal consolidation driven by the removal of COVID-related spending on unemployment benefits and other related items, along with a revenue recovery, will support fiscal consolidation, which will reduce the debt burden gradually.
“The Bahamas' debt burden will remain close to 80 percent of GDP by the end of fiscal year 2022-2023 well above the ‘Ba3’-rated median (60 percent). Moreover, The Bahamas' narrow revenue base means its debt measured by the debt-to-revenue ratio, which stood at 509 percent at the end of fiscal year 2020-2021, will also remain significantly higher than the Ba-rated median of 266 percent.
“The combination of a rising debt burden and a decline in revenue contributed to a further worsening of debt affordability, with the interest-to-revenue ratio increasing to 23 percent in fiscal year 2020-2021 compared with 16 percent in fiscal year 2019-2020. Moody's expects the interest-to-revenue ratio to peak in fiscal year 2021-2022, but to remain above 20 percent over the subsequent three years, and significantly higher than rated peers.”
On the positive side, Moody’s said the Government’s debt had a “favourable structure thanks to a captive domestic investor base” while its external debt has “a long maturity profile” due to principal repayments being spread out between issues and over many years.
“The Bahamas' relatively strong institutional framework, stable political system and a fiscal policy framework that is more responsive to economic shocks have supported the credit profile,” the rating agency added.
“The Bahamas also stands out among similarly-rated peers because of its comparatively high level of GDP per capita, which supports its debt-carrying capacity.”
However, Moody’s added that the downgrade was initiated because The Bahamas’ economic strength had “materially decreased” while its debt burden had skyrocketed, thus leaving the country extremely vulnerable to future hurricanes, pandemics and recessions.
“The negative outlook reflects the ongoing risks to the credit profile related to the pace of fiscal consolidation, which will be determined largely by how quickly tourism activity recovers,” Moody’s added. “A slower pace of fiscal consolidation would result in higher borrowing requirements and exacerbate funding risks.
“The reliance on indirect taxation -- VAT and excise taxes -- makes government tax collection more sensitive to the speed of the economic recovery. A slower recovery would place downward pressure on revenue and limit the speed of fiscal consolidation, and prospects for debt stabilisation. Larger-than-expected fiscal deficits in turn would increase reliance on external market borrowing and could create external liquidity pressure.”
Moody’s suggested that an improvement in The Bahamas’ sovereign credit rating was unlikely in the near term. It added: “The implementation of fiscal and economic policies that support a fiscal consolidation process that places government debt on a more durable downward trajectory would likely result in a return to a stable outlook.
“An improvement in debt affordability, which includes relying more on lower-cost domestic and external official sources of funding over more expensive external market issuance, could also support a return to a stable outlook.
“A slower pace of fiscal consolidation that contributes to tightening financing conditions, and a rise in borrowing costs, which would challenge the Government's ability to finance fiscal deficits and maturing debt would likely lead to a further downgrade.”
Comments
killemwitdakno 2 years, 7 months ago
Ok. Someone wasn't happy..
Baha10 2 years, 7 months ago
Here we go … Train of Doom … “remarkably” delayed for 48 years but cleared for immediate departure … All Aboard!
TalRussell 2 years, 7 months ago
The colony's Voters, — excluding some scattered about Grand Bahamaland, — had've — Moody sensed — the real reason for not to trust — Minnis's lone decision to conduct a snap 2021 election— Yet, there exists — some sayin' — we is a colony of stupid voters.— Yes?
DonAnthony 2 years, 7 months ago
Simple solution STOP BORROWING and live with our means. We need an across the board reduction in civil servants salary by 10%. Sell even at a lost virtually all public corporations, particularly Bahamas air and ZNS. We have a government larger than what we can afford.
killemwitdakno 2 years, 7 months ago
NEVER B'AIR NEVER
wardnr2 2 years, 7 months ago
Not that simple. They have to borrow to service the debt (make payments) because the income is less than debt and about to be less than the interest in short order.
We're getting downgraded because the income has decreased to a point where the debt will explode to compensate and with rising interest rates we could hit 10-20x debt to income making repayment even less likely and devaluation a possibility
GodSpeed 2 years, 7 months ago
you can't pay off debt by creating more debt
TalRussell 2 years, 7 months ago
ComradeDonA, I've written — the catchy slogan — will knock socks right off Premier Brave's — civil servants and government workers. — Here it is:
— Premier Brave's — Governing Motto: — 'A Healthy Environment and a Healthy Economy — Go Together' — Like A Horse and Buggy— Yes? —
DonAnthony 2 years, 7 months ago
Like love and marriage - yes or no?
TalRussell 2 years, 7 months ago
@Comrade DonA, sit on a chair, just in case you become all dizzy after reading: — Moody, doesn't even know about the civil servants, government workers, and the — hundreds of political appointees and hires — plus the consultants, and advisors, — Who upon exiting government has been, — Presented with the opportunity to keep their government-issued fleet vehicle — and government-insured license plates? — Trust me, that I am not making this one up— Yes?
KapunkleUp 2 years, 7 months ago
And now we know the reason for the early election...
whogothere 2 years, 7 months ago
Yes the 'tihs' will soon hit the fan...
ohdrap4 2 years, 7 months ago
To save money, I would start by not paying Moody's.
Bonefishpete 2 years, 7 months ago
Meh, wake me when the Bahamian Dollar falls below the Greenback.
rodentos 2 years, 7 months ago
Country is broke
Honestman 2 years, 7 months ago
What a sobering wake up call this morning. Brave's hands are going to be firmly tied behind his back during the next 5 years. The governnent simply cannot borrow its way out of this crisis and we are being warned of a further downgrade if we drag our heals on fiscal consolidation. What a poison chalice the new PM has inherited! The PLP are going to have to display a level of fiscal responsibility that they have been unable to achieve historically in order to avoid a devaluation. This means cutting our cloth in a big way which will surely involve a reduction in the civil service payroll and a selling off of the loss making government corporations. Forget any reduction in VAT. Property tax needs to be increased and a zero tolerance for non-payment introduced. And finally the government cannot ignore the huge under funding of the state pension. We cannot kick that can down the road for another 5 years. Things gonna be tough for a while folks - brace yourselves for a long bumpy ride.
truetruebahamian 2 years, 7 months ago
Downtown property tax cannot increase, we have to borrow just to pay. Thus a double expense with nothing coming in to cover either.
ThisIsOurs 2 years, 7 months ago
They need to foster innovation. Its why the US and Asian economies grow. Innovation. Stop stealing peoples ideas and touting them as brilliant govt initiatives. innovation has no age colour or gender. So stop talking about "young" people with ideas and starting talking seeking innovators. Let youth development be it's own thing
realitycheck242 2 years, 7 months ago
WoW .....and all of this is happening while the potential hurricane systems are out there playing hit and miss with the Bahamas. This is another down grade .that the new opposition can claim happened under the PLP. We can forget the two percent Vat decrease promise. No PLP government has ever displayed a steady fiscal responsible hand while governing this country. Thats how we got in this situation in the first place. Thank god for all the new fiscal responsibility legislation implemented under the Minnis administration.
Wait until we next hair from the IMF. Our day of reckoning has just begun,
Proguing 2 years, 7 months ago
A departing gift from Minnis to Davis! Considering that VAT is the #1 revenue for the government, the decrease announced by Davis will soon lead to another downgrade.
TigerB 2 years, 7 months ago
Well seems Chester has the answer, he better... they say they will fix it, that is why they the government. The FNN borrow too much they say...no more talk, once they get sworn in time to go to work.
whogothere 2 years, 7 months ago
Hmmmm...if and when the country defaults on it's loans and incurs the wrath of multiple super-national banks - what then? The only way out of is this is tax and it's got to be on the wealthy, spec investors leveraging this country real estate to milk their fortunes..Idle land must be taxed...a serious audit of real estate valuation for property tax in the out islands must happen...Large corporation have got to pay.. and stupid capital projects like the 30 million glass window bridge to no where must be shelved...government bureaucratic fat must be cut and investment in education and health service must start...and above all the borrowing must cease...
And I have to wonder if Minnis regrets catering this economy by lockdowns and building side walks when he could have been building health care facilities....
BONEFISH 2 years, 7 months ago
A poison chalice. An economist from the Royal Bank of Canada felt that this country is on verge of a debt default. Also this country may have to enter an IMF program. That is the reason for this early election. It was done before in Jamaica.
There are no magic bullets to this country's problems. Don't believe what ever foolishness certain politicians or certain elements of the media say.
concerned799 2 years, 7 months ago
Bahamas must make more money per tourist to pay this all off. You can't do that at the low levels of spend per cruise visitor. Government policy has to be used to get the tourists off cruise ship based tourism and into hotels. Fortunately, cancelling the cruise ship permissions to enter the Bahamas can be done by government decree alone. Ideally you do this with other islands and Central America, but if not you do it alone.
TalRussell 2 years, 7 months ago
It will heighten the level of financial fear left behind by a failed Red government, — If indeed, Minnis, and his band of 38 Candidates — were out campaigning, whilst tucked away, was Moody's data— Yet, blocking its release to the Popoulaces, since August 20.— With not the slightest hesitation be — Promising the PopoulacesVoters — Sets Red Keys To Hundreds Newly Constructed Homes, and On Be On Your Journey To A Happy Life? — Yes?
FrustratedBusinessman 2 years, 7 months ago
Brave might have actually been telling the truth after all about the government informing creditors about an early election lol. No way was the timing of this announcement coincidental, it is a major disservice to Brave to have a downgrade on his second day in office.
bahamianson 2 years, 7 months ago
No, what probably happened was, because of Dorian and the pandemic, we were.going to be downgraded anyway. What Moodys did was the correct thing to do. Moodys waited until the election was.over to announce the downgrade. If they had announced the downgrade before the election , it would have appeared that they were influenving the outcome of a.sovereign country's election process. They waited , and it was.the right thing. It isnt coincidental, they did noy want.to announce before the election. They probably wete.going to do it , and that is why Minnis called it early. Just my thoughts.....
TalRussell 2 years, 7 months ago
@Comradebahamian, what if you assume certain things to be true when there exists — historical data — points to the contrary, — Yes?
FrustratedBusinessman 2 years, 7 months ago
Ok, I can see what you are saying, but it is a partisan move either way. Politics is all about optics, with facts taking a back seat unfortunately. All the FNM has to do is say that Brave got downgraded on his second day in office, and it is true. To the uninformed observer, it could appear to be a direct response to a PLP victory as well. People often don't look for the deeper context behind these issues. Besides, they delayed the announcement past the usual release date, which means that someone had to inform them. Election was not called until the later part of August.
KapunkleUp 2 years, 7 months ago
Dorian and the pandemic certainly exacerbated the debt problem but the truth is that every government for the last 20 years has made it worse piecemeal. Both the FNM and PLP are guilty of increasing our debt by mismanagement of public funds due to ignorance and self enrichment. Have you ever noticed that EVERY SINGLE Prime Minister and Cabinet Minister seems to come out a lot wealthier at the end of the 5 years?!
TalRussell 2 years, 7 months ago
There's a long list of MPs. who served and — Never used their office as their personal ATMs. — And, yes, — At the very top the list alongside — The Most Honorable, — Is the names of several we colony's former finance ministers, And. without exclusions, — As to they's political parties colours, — Yes?
donald 2 years, 7 months ago
Government needs to get out of private business. Get out of banking, airline, taking over bankrupt hotels, etc. Government loses money and creates opportunity for corruption. privatize all companies ASAP
OMG 2 years, 7 months ago
This is reality Mr Davies and your idea to reduce VAT to 10% may be a lie or a vote pleaser but it is utter madness to decrease your limited budget income at this time. How about not hiring all those who were promised a civil service job for election victory, Make everyone with any property of reasonable value pay and pay now property taxes, add 25 cents to every bottle of liquor and $1 on cigarettes. It is a fact that many expats selling their houses after 20-30 years of ownership never paid their taxes because their reasoning was take it out of the proceeds of the sale. That means taxes due say 15 years ago but not paid till 2021 have lost their purchasing value whilst the government continues to pay interest on loans. Make all politicians pay their electricity bills. Sell unused rented or owned government properties. God knows as individuals we have to balance expenditure versus income and evaluate whether a loan is necessary.. There are so many ways the PLP and FNM could save money but refuse to face up to reality. Go ahead Mr Davies , placate the great unwashed with rewards and meaningless tit bits but devaluation looms. and that will make todays cost of living seem cheap.
M0J0 2 years, 7 months ago
after effect of the red party. They burrowed burrowed and never even initiated anything to assist in the repaying of they mountain they burrowed. Dorian loan never even touched the people affected but the money was spent.
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