U.S. rating agency Moody’s downgraded the Bahamas’ sovereign creditworthiness as the country welcomed a new government last week following the general election.
Moody’s has downgraded the ratings of the country’s long-term issuer and senior unsecured to âBa3â from âBa2â, warning that the devastation wrought by the COVID-19 pandemic and Hurricane Dorian in 2019 will have â lasting consequences âfor the economy of the Bahamas, while predicting that stopover arrivals will return to pre-pandemic figures in 2024.
Moody’s, maintaining a “negative outlook” on the Bahamas, justified the downgrade by saying that “the downgrade to Ba3 reflects the significant erosion of the economic and fiscal strength of the Bahamas caused by the coronavirus pandemic.”
“Moody’s expects the gradual recovery in tourism to have a lasting impact on the Bahamas’ credit profile through significantly higher debt and interest burden, which will significantly exceed those of its peers noted Ba3.
Moody’s has said the Bahamian national debt of $ 10.356 billion is now more than six times the annual income or the government’s revenue base, and financial watchers warn that the latest report by the US rating agency could lead to a further increase in government borrowing. costs.
The former government had already indicated that its 2021-2022 borrowing plan would lead the country to seek to place a bond of 700 million dollars on the international capital markets in late September-early October, depending on the conditions at the time.
A notch this time
The rating agency only slashed the Bahamas’ sovereign creditworthiness, which measures the government’s ability to pay debts and bills, only one notch, after slashing it by two places in June 2020.
“The duration and severity of the coronavirus shock fundamentally weakened the Bahamas’ credit profile with lasting consequences in terms of higher debt burden and lower debt affordability, as well as reduced economic strength.” , Moody’s said.
He said real gross domestic product, or GDP, contracted 14.5% in 2020, with the tourism industry hardest hit by a shutdown that lasted most of the year. Despite the increase in tourism activity in recent months, the Bahamas face the prospect of a slow economic recovery, and which remains vulnerable to potential future variants of the coronavirus. Moody’s expects stay-in tourist arrivals to return to 2019 levels only by 2024 at the earliest. “
He said that with the Bahamas’ debt and interest repayment charges higher than those of other countries rated “Ba” by Moody’s, the rating agency added that the national debt of $ 10.356 billion was six. times greater than the government revenues cut from COVID at the end of June 2021..
“The Bahamas’ debt burden was already higher than that of its Ba-rated peers before the pandemic, and will remain higher than its similarly-rated peers, as the economy only slowly recovers from the pandemic,” said Moody’s.
âThe fiscal consolidation brought about by the removal of COVID-related spending on unemployment benefits and other related items, as well as a recovery in revenue, will support fiscal consolidation, which will gradually reduce the debt burden.
âThe Bahamas’ debt burden will remain close to 80 percent of GDP by the end of fiscal year 2022-2023, well above the median rated Ba3 (60 percent). Additionally, the Bahamas’ narrow income base means that its debt as measured by debt-to-revenue ratio, which stood at 509% at the end of fiscal year 2020-2021, will also remain significantly higher than the Bahamian rated median. of 266. percent.
âThe combination of a growing debt burden and declining income has contributed to a further deterioration in affordability of debt, with the interest-to-income ratio falling to 23% in fiscal year 2020-2021 , compared to 16% during the year. 2019-2020. Moody’s expects the interest-to-income ratio to peak in fiscal year 2021-2022, but to remain above 20% over the next three years, and significantly higher than its rated peers.
But Moody’s also said government debt has a “favorable structure, thanks to a base of captive domestic investors,” while its external debt has “a long maturity profile” due to principal repayments spread between issues. and over many years.
The Bahamas’ relatively strong institutional framework, stable political system and a fiscal policy framework more responsive to economic shocks have supported the credit profile, he said, noting that the country also stands out from similarly rated peers. due to its relatively high credit level. level of GDP per capita, which supports its debt capacity.
The debt burden has skyrocketed
However, Moody’s said the downgrade was initiated because the country’s economic strength had “significantly diminished” as its debt burden skyrocketed, leaving the country extremely vulnerable to future hurricanes, pandemics and recessions.
âThe negative outlook reflects the lingering risks to the credit profile associated with the pace of fiscal consolidation, which will be largely determined by how quickly tourism activity picks up. A slower pace of fiscal consolidation would increase financing needs and exacerbate financing risks.
âThe use of indirect taxation – VAT and excise duties – makes the collection of public taxes more sensitive to the speed of the economic recovery. A slower recovery would put downward pressure on revenues and limit the speed of fiscal consolidation, as well as the outlook for debt stabilization. Larger than expected budget deficits, in turn, would increase dependence on borrowing in the external market and could create external liquidity pressure. “
Moody’s suggested that an improvement in the country’s sovereign credit rating was unlikely in the short term, noting that “the implementation of fiscal and economic policies that support a process of fiscal consolidation that puts public debt on a path more sustainable top-down would probably lead to a return to a stable outlook â.
“Improving the affordability of debt, which includes relying more on lower-cost official domestic and external sources of finance rather than more expensive issuance on the external market, could also promote a return to low-cost debt. stable outlook, âhe said.