By NEIL HARTNELL
Tribune Business Editor
nhartnell@tribunemedia.net
Standard & Poor’s (S&P) last night made good on its threat to downgrade the Bahamas’ sovereign creditworthiness, warning of “depressed growth” due to a combination of the Baha Mar dispute and long-term structural weaknesses in the economy.
The rating agency, in predicting that this nation would suffer low GDP per capita growth of less than 1 per cent “over the next several years”, warned there was greater than “a one-in-three” chance that it could slash the Bahamas’ creditworthiness again within the next six months to two years.
And, perhaps significantly, S&P warned that the Christie administration’s handling of the Baha Mar dispute - not just the outcome - would be a major factor in determining whether it lowered the Bahamas’ credit rating again.
It predicted that Baha Mar would now not open in time for the peak 2015-2016 winter season, and that visitor demand for the resort would take longer to materialise due to the “reputational damage” sustained by the dispute over the project.
The only comfort for the Government (and Bahamian people) is that this nation held on to an ‘investment grade’ by its fingertips, as S&P cut the sovereign rating to ‘BBB-/A-3’ from ‘BBB+/A-2’.
This leaves the Bahamas’ sovereign creditworthiness just one notch above so-called ‘junk’ status, a level that would likely impact both investor perceptions of this economy and the Government’s ability to access, and associated interest costs, on the international capital markets.
S&P said it had only kept the Bahamas at ‘investment grade’ because of the Government’s fiscal reform progress to-date, but warned that this needed to be accompanied by higher economic growth rates to “stabilise” the $6.2 billion national debt.
The Ministry of Finance last night hit back somewhat at S&P, arguing that it had failed to give the Government enough credit for Value-Added Tax (VAT) implementation and its wider fiscal reform programme, plus the economy’s improved outlook.
However, the Ministry conceded that S&P’s action was not unexpected, given its previous decision to place the Bahamas on ‘credit watch’. And the rating agency indicated that long-term issues plaguing the economy had contributed as much as the Baha Mar debacle to it its latest decision.
“Growth bottlenecks, including high household indebtedness, loan arrears, and unemployment levels, as well as energy inefficiencies, continue to subdue growth prospects of the Bahamian economy,” S&P said in its analysis
“We believe the Baha Mar bankruptcy filing and subsequent legal disputes will depress growth and possibly affect the fiscal and external accounts. As a result, we are lowering our foreign and local currency sovereign credit ratings on The Bahamas to ‘BBB-/A-3’ from ‘BBB/A-2’.”
S&P added that its actions “reflect both long-term vulnerabilities and the short-term economic shock of the Baha Mar bankruptcy filing and subsequent legal disputes.
“The long-term vulnerabilities include a weakening external position and fragile domestic economy. The net external debt of the public and financial sectors has risen from 14 per cent of current account receipts (CAR) in 2008 to an estimated 48 per cent of CAR this year.
“The net external financing needs of the public and financial sectors rose from 141 per cent of CAR to 159 per cent during the same period.”
Emphasising that those figures did not include the Bahamas’ foreign-held debt and foreign direct investment (FDI) in the tourism sector, S&P added: “In the domestic economy, non-performing loans are more than 15 per cent of total loans.
“Consumer credit and outstanding residential mortgages are more than 60 per cent of GDP. Unemployment - excluding seasonal effects - remains elevated. An inefficient energy sector pushes up energy costs and weighs on growth.”
The Government last night said this assessment ignored the two percentage point fall in the unemployment rate, as measured in May, plus efforts to secure PowerSecure as the Bahamas Electricity Corporation’s (BEC) new manager.
Describing Baha Mar as more a “short-term economic shock”, S&P said the prospects of a rapid solution to the dispute between the developer and its Chinese partners (with the Government as ‘mediator’) “have become more remote”.
“We do not believe that the parties involved - the developer, Baha Mar Ltd, its main lender, the Export-Import Bank of Chin,; and the contractor, China Construction America - will manage to resolve their differences in time for the resort to open for the high season beginning in December,” S&P added.
“Not only do we see the completion of construction of this $3.5 billion mega-resort being delayed, but we also expect that bookings will take longer to fill the complex once it does open, given the reputational damage to the resort’s brand as well as the time needed to obtain new airlift capacity for the resort.”
Summing up what this really means for Bahamians, S&P added: “We believe that the combination of long-term vulnerabilities with a short-term economic shock will continue to place the Bahamas in a low-growth trend, with real GDP per capita growth of less than 1 per cent over the next several years.
“This is less than we forecast for its peers with similar levels of GDP per capita, and it follows negative real GDP per capita growth since 2008.”
Confirming that it was maintaining a negative outlook on the Bahamas, S&P said: “The negative outlook reflects our view that there is a greater than one-in-three likelihood that we could again lower our ratings on the Bahamas within six to 24 months.
“We could lower our ratings if the Baha Mar proceedings have knock-on effects on the island’s growth prospects, fiscal accounts, or external position beyond our current estimates.
“We could also lower our ratings if the handling of the Baha Mar project, and its wider implications, leads us to reassess our view of The Bahamas’ institutional settings, which we currently view as a rating strength.
“On the other hand, the ratings could stabilise at the current levels if our concerns about this short-term shock do not materialise, or if the Government takes measures to compensate for the economic damage it could inflict.”
S&P conceded that the $150 million net new revenue raised in the first six months of VAT implementation, coupled with tax system improvements, would help reduce the rate of government debt growth to 3 per cent of GDP in 2015.
This represented a fall from 7 per cent growth in 2014, and S&P added: “The introduction of the VAT further demonstrates the sovereign’s track record of generally prudent policies through different governments, which has provided the country with institutional stability, and supports the Bahamas’ creditworthiness.”
Comments
Bahamian_in_London 9 years, 3 months ago
Sadly inevitable.
What is more worrying is that the current downgrade is on the premise that Baha Mar will be open in the near future - something that is categorically not possible if the Government continues downs its poorly chosen path of supporting CCA and trying to wind the Company up.
If the winding up petition continues and is approved, we are almost guaranteed to get a further credit downgrade to junk status - at which point the cost of Government borrowing (as well as consumer and business borrowing) will rise significantly, along with our country's deficit.
asiseeit 9 years, 3 months ago
I am almost convinced that the PLP's plan for redistribution of wealth is at the heart of all of their moves. I believe they want to bring the country to it's knee's so as to drive any and all people with sense out of the country. Once the mass exodus starts they will be able to "buy" the country up for cents on the dollar. It does not matter that the country will be a shell of it's former self, PLP's will own that shell. See they are vindictive, small minded, and criminal in nature, they most certainly could not rise above the fray and get theirs in any sort of legal manner or without the help of the political offices they hold. This is why I think the PLP is a mafia organization, better to be the lords of a shit hole than nothing at all, RIGHT?
observer2 9 years, 3 months ago
Looks like total national debt (including government corporations) at 3/15 was $6.3b versus 3/14 at $5.6b (an increase of 11% in one year).
External reserves at 3/15 were $829m and at 3/14 were $957m, a decrease of 15%.
Everyone should to tighten their belts and conserve their funds in case there is a rainy day.
A devaluation is not in the cards but some larger private businesses are complaining about high local costs (payroll, electricity, shipping and taxes). A one time devaluation similar to what China just did could perhaps increase our competitiveness.
newcitizen 9 years, 3 months ago
A devaluation of the currency, by even a small amount would be catastrophic to the Bahamian economy. Since we import about 95% of all good here. You only increase the competitiveness if you produce something. Our costs will remain the same in US dollars, it will just cost us more Bahamian dollars. It will also devalue everyone who has any savings in BSD. So costs will remain the same but we will have less money to pay for things.
A one time devaluation or any devaluation of our dollar is not something the Bahamas can deal with.
observer2 9 years, 3 months ago
Newcitizen, we actually produce a Tourism product with a very high labour cost coupled with low worker productivity. By devaluing the B$ it actually reduces the cost of our product as most Tourist dollars are received in US$. Once there is a 20% B$ devaluation our hotels could bring down the cost of their rooms and restaurants and pass the savings on to the tourist. A lower cost product will bring more tourist to the Bahamas and increase GDP. It will be hard to increase Bahamian productivity without improving education or bringing down the cost of electricity, neither of which will improve anytime soon.
You can't increase business license fees, minimum wage, VAT, gaming taxes and national insurance as the hotels are already working at a loss and will have to pass these costs onto the tourist making our tourism product less competitive. Taxes will also need to be increased again to pay for the national health program which will start in January 2016. Perhaps this can be done by increasing national insurance again.
The government is providing essential services for which it needs to be paid and thus we have to have higher taxes. Also without increasing taxes we will never get the national debt down.
I think a devaluation will be the next thing that the government needs to do to increase competitiveness, especially with a low cost tourism product on our doorstep (Cuba). Tourist shop around and if they can go to Cuba for less money they will.
Devaluations to be credible must be sudden and large enough so they can be seen as credible. China gave no warning of its devaluation which increased their competitiveness as their products are now cheaper. Now the global markets are recovering after being caught off guard.
asiseeit 9 years, 3 months ago
Thank you for speaking sense. Observer2 is full of crap, government does not provide any return on our taxes. We pay dearly for everything. If you really want to be safe in this country you must live in a gated community, electric is the most expensive in the region, education is crap, roads on a whole suck, the law is only for the regular citizen. corruption is rampant, the playing field is reserved for the political elite, healthcare is deplorable,so tell me what I pay the mafia organization called the Government for, what really do I get for my taxes. I will tell you what, JACK SQUAT!
John 9 years, 3 months ago
When y'all go to GOD and pray for something y'all still have to come back to me after y'all finish praying 'cause I is da prime minister! Let us pray, Amen
shortpants 9 years, 3 months ago
John that say statement is costing the PM a whole heap of problems. I don't think he remember that GOD is always in control and not man. Play with your earthly god not our heavenly father.He will live long enough to see that when you play with FIRE you will get burn. Time always longer than rope. All of his Merry men are jumping ship and he will be the only rat left to drown all by himself.
banker 9 years, 3 months ago
Baha Mar is a flash in the pan -- a tempest in a teapot when you consider the overall picture. The telling statement is structural weakness. That will bring the house crashing down. The PLP are just (almost thankfully) accelerating the crash. S&P is predicting less than 1% growth, but actually the growth will be negative unless massive inflation keeps it steady. Massive inflation is not a thing wished-for. We are one step away from a junk status rating and it will come within the next 3-6 months.
The reputational damage done by Christie and Maynard Gibson is huge. If they had let Izmirlian carry on and finish the project, then it would have been a minor blip. Unfortunately Christie & the PLP sided with the Chinese, and should have been reading the business news about the Chinese stockmarket crash which is an ongoing saga. Not only did they back the wrong horse, but the only thing that they got for their efforts is horse apples.
There will be no economic growth. What that really means is that the backsliding will accelerate because there will be no growth to counter it. If the government manages to keep the debt growth rate at an impossible 3%, then in less than 10 years, the national debt will be 100% of the economy.
There will be a devaluation of the Bahamian dollar, and it will have to come within 3-5 years, and the suffering of the population will be horrendous. By 2017, there will be very little left to save.
observer2 9 years, 3 months ago
Banker, a devaluation would be good for our economy. See my comments above in response Newcitizen.
Currently the Bahamian dollar is not on par with the US dollar. The Bahamian dollar is actually worth 1/2% more than the US dollar! If you deposit a US$1,000 check in any bank they will only give you B$995. The $5 (1/2%) difference they call an FX fee, however I would argue that this is not an FX fee but a conversion rate because no matter which bank you go to the fee is the same and is fixed. This is cartel like behaviour that administration after administration allows to occur which rips off Bahamians by hundreds of millions over the decades. This is not a government charge (which I would be happy with because the government needs money and is broke) but it goes straight to the profit of Canadian banks which then dividend it to Toronto after Barbados gets its cut... the Canadian banks then cut jobs and close branches is places like Long Island where they do not care about local communities.
The banks do absolutely nothing to earn the 1/2% but we are paying for the privilege of converting a high quality world reserve currency (US$) into a non convertible, exchange controlled currency.
No wonder foreigners think we as Bahamians are stupid. I guess we believe anything foreigners tell us is true.
newcitizen 9 years, 3 months ago
You're understanding of how a devaluation would play out is wrong. Also, your understanding of how the banking exchange system works.
asiseeit 9 years, 3 months ago
observer2, you need to go back to school. Do you realize that we IMPORT EVERYTHING. How are you going to afford to do that when all of a sudden your 1$ turns out to be only .75 cents. Right now we spend about 3 BILLION dollars a year just in Florida, how will that work out if our dollar is devalued? Devaluation only works if you have an export market, pray tell what do we export, stupidity?
asiseeit 9 years, 3 months ago
As stated above, the PLP is trying to destroy the country, there can be no other conclusion.
Rontom 9 years, 3 months ago
Junk bonds are fixed-income instruments that carry a rating of 'BB' or lower by Standard & Poor's, or 'Ba' or below by Moody's. Junk bonds are so called because of their higher default risk in relation to investment-grade bonds.
Read more: Junk Bond Definition | Investopedia http://www.investopedia.com/terms/j/jun… Follow us: Investopedia on Facebook
Banker, you are correct: we are one step away from widespread disaster. Finance is not my specialty, but I can balance a cheque book. I don't think these people in Plp get it. I don't think they understand how perilous times awaits us. I think they believe that China still has growth and therefore money to lend to us; that we still will ride this storm out; that the world will still lend us money and another fdi is just around the corner; that they will be able to survive this without being prosecuted, shamed, and jailed... Two days before Primal Scream
Concerned123 9 years, 3 months ago
"Except the Lord build the house, they labour in vain that build it." Psalm 127:1
TalRussell 9 years, 3 months ago
Comrades. I pose a question to the PLP cabinet. I think it's safe to assume many of the thousands of regular numbers players are also people ending up in possession of American currency. Where does the many multiples in millions US dollars that they wager on numbers - end up. Is it deposited in local banks by the web shops/numbers houses? Does the millions US currency, ever have to be declared to the authorities?
asiseeit 9 years, 3 months ago
Cartel money, you best stop this line of questioning.
banker 9 years, 3 months ago
Bob is your uncle.
TalRussell 9 years, 3 months ago
Comrade Banker, if only we Bahamalanders - could return to the days when Bob was we uncle - when we could be proud of uncle Bob. when life was so carefree, simple, safer - something even our memories are being brainwashed that we have to accept things as they are - even if it means we are to pretend it was OK for some government official to sign-off on that intrusive, extravagance of a Cable Beach 'dock.'
banker 9 years, 3 months ago
I agree with you about the simpler times. I can remember when Montell Heights had well-kept houses and quaint neighbourhoods. Even those with a rudimentary education could write beautiful cursive script. There was a sense of friendliness and belonging. One couldn't walk the street without meeting someone that you knew -- or were related to. There was a wonderful politesse when even strangers on ascending the steps of a jitney would say "Good Afternoon" and the congregation aboard the jitney would reply as one. The markets were rudimentary, but the fruits of the sea were plentiful. Nobody had money but nobody starved. It seems that we were a happier bunch, with a greater sense of community, and it all went to hell.
TomMariner 9 years, 3 months ago
The government of the Bahamas isn't the only one taking a hit here.
Even if it is Chinese money behind the venture, even if they "favor" the local politicians, who is going to take a chance of the same finger pointing, petulant blame of a construction company dumb enough to not use local talent?
Flying in gazillions of workers from the homeland might make the CCA management look good back home, but it obviously does not get a project the size and quality of Baha Mar built and accepting guests, conventions, and gamblers.
Wait, "not my fault" -- yeah it is -- the job was to get a construction project done! On time.
MonkeeDoo 9 years, 3 months ago
Comrade Tal: Why you don't give that poor dock a break now. It's probably insured and if this hurricane passes through like they say, she gone ! You ever see the sea rage out there ? What you going write about then.
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