Moody’s downgrades The Bahamas’ sovereign creditworthiness
The US-based rating agency Moody’s has downgraded the sovereign creditworthiness of The Bahamas as the country welcomed a new government last week following general elections.
Moody’s slashed the country’s long-term issuer and senior unsecured ratings to ‘Ba3’ from ‘Ba2’, warning that the devastation inflicted by the COVID-19 pandemic and Hurricane Dorian in 2019 will have “lasting consequences” for the Bahamian economy, while predicting that stopover arrivals will return to pre-pandemic numbers in 2024.
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.”
Moody’s said that The Bahamas’ US$10.356 billion national debt is now more than six times bigger than the government’s annual income or revenue base, and financial observers warn that the latest report by the US rating agency could lead to a further increase in the government’s borrowing costs.
The former government had already indicated that its 2021-2022 borrowing plan would result in the country seeking to place a US$700-million bond with the international capital markets in late September-early October, depending on prevailing conditions.
One Notch this Time
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.
It said real gross domestic product, or GDP, contracted by 14.5 per cent 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.”
It said that with The Bahamas’ debt and interest repayment burdens higher than other countries rated ‘Ba’ by Moody’s, the rating agency added that the $10.356 billion 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 per cent of GDP by the end of fiscal year 2022-2023, well above the Ba3-rated median (60 per cent). Moreover, The Bahamas’ narrow revenue base means its debt measured by the debt-to-revenue ratio, which stood at 509 per cent at the end of fiscal year 2020-2021, will also remain significantly higher than the Ba-rated median of 266 per cent.
“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 per cent in fiscal year 2020-2021, compared with 16 per cent 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 per cent over the subsequent three years, and significantly higher than rated peers.”
But Moody’s also indicated that 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, it said, noting that the country also stands out among similarly rated peers because of its comparatively high level of GDP per capita, which supports its debt-carrying capacity.
Debt Burden Skyrocketed
However, Moody’s said that the downgrade was initiated because the country’s 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. 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 country’s sovereign credit rating was unlikely in the near term, noting “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,” it said.