The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas yesterday “dodged a bullet” after Moody’s chose not to downgrade its creditworthiness to ‘junk’ status’, and instead upgraded its outlook on this nation to ‘stable’.

The international credit rating agency maintained the Bahamas’ ‘investment grade’ status at the lowest possible level, downgrading its creditworthiness by one notch - from ‘Baa2’ to ‘Baa3’ - but that was as bad as it got for the Government.

Apart from avoiding ‘junk’ status, the Christie administration can take positives from Moody’s decision to upgrade its outlook on this nation’s economic and fiscal prospects to ‘stable’.

This implies that the Bahamas faces no prospect of a further Moody’s downgrade in the short to medium term, with the rating agency saying it expected both the $6.778 billion national debt and economic growth to “stabilise” within the next two years.

Moody’s, in an upbeat assessment of the Bahamas’ immediate prospects, said it expected this nation’s economic growth prospects to “strengthen” between now and 2018, returning to levels close to its 1-1.5 per cent.

However, it acknowledged that the Bahamas’ economic and fiscal fundamentals - especially its strength - had “materially decreased”, and this nation has much work ahead of it to return to a sustainable fiscal and growth path.

K P Turnquest, the Opposition’s deputy leader and finance spokesman, told Tribune Business that the Bahamas had “dodged a bullet” after Moody’s chose not to downgrade this nation to ‘junk’ status (see other article on Page 1B).

He described the rating agency’s one-notch downgrade as “fair”, and added that it represented “mixed news” for the Bahamas and its economy.

Branville McCartney, the Democratic National Alliance’s (DNA) leader, described Moody’s verdict and accompanying analysis as “bittersweet” for the Bahamas and its economy.

While this nation had avoided the “devastating” impact of a downgrade to ‘junk’ status, Mr McCartney said Moody’s had effectively “given us breathing space to get our house in order again” (see other article on Page 1B).

The loss of ‘investment grade’ status would have been highly damaging for the Bahamas and its economy, as it would have signalled to the international capital markets that this nation’s creditworthiness was slipping into dangerous territory.

While the Government may still have to pay more for current and future debt issues, raising its debt servicing (interest) costs, and sucking money away from essential public and security services, the ‘one notch’ downgrade is not as bad an outcome as ‘junk’ status.

A downgrade to ‘junk’ could also have deterred investors assessing the Bahamas as a place to invest, as it raises questions about the Government’s economic management.

Moody’s, in explaining the rationale for the ‘one notch’ downgrade, said its action had been driven by a combination of low economic growth and “the persistent increase in the Government’s debt ratio notwithstanding its ongoing consolidation programme.

Arguing that the Bahamas’ economic strength was “weaker” that countries with similar credit ratings, Moody’s nevertheless projected that its GDP growth will improve modestly to an average 1.3 per cent between 2016-2020.

“The first driver for the downgrade is Moody’s expectation that the Bahamas’ economic performance over the next five years will likely remain subdued and constrained by structural rigidities,” the rating agency said.

“Moody’s forecasts that the Bahamian economy will recover in 2016-20, with real GDP growth expected to average 1.3 per cent during this period, the fourth weakest economic performance out of the current 22 Baa-rated sovereigns.”

Describing the obstacles to greater Bahamian economic growth, Moody’s added: “Structural constraints that limit potential growth include relatively high energy costs, a bureaucratic burden that hinders doing business and labour market rigidities.

“These constraints are reflected in, for example, the prevalent high rate of unemployment and non-performing loans in the banking system, and have also negatively affected the competitiveness of the tourism sector - a mainstay of the Bahamas’ economy - that accounts directly and indirectly for about 50 per cent of GDP.

“While authorities have implemented some measures to address these issues and have put forward a pro-growth reform agenda via the National Development Plan, progress has been slow so far.”

As a result, Moody’s said the Bahamas’ economic strength will remain ‘low’ - the “lowest score” among similarly-rated ‘Baa’ nations, which enjoy ‘moderate’ strength.

This implies that Moody’s wants to see much more rapid reform progress than the Christie administration has been able to achieve to-date, as it reiterated that the Government’s fiscal consolidation targets are too aggressive and optimistic.

Its analysis said that despite the Government’s efforts to rein in persistent, nine-figure annual deficits, the continual “deterioration” of its balance sheet had resulted in “more limited fiscal space” compared to similarly rated nations.

Moody’s also noted that despite the $600.3 million revenue boost from Value-Added Tax (VAT) during the first 11 months of the 2015-2016 fiscal year, the national debt had continued to rise - albeit more slowly - to its present $6.778 billion.

“The Government has reduced the fiscal deficit for three consecutive years, with more progress attained following the introduction of a VAT in January 2015 that has outperformed government estimates,” Moody’s said.

“Nevertheless, the Bahamas’ government debt-to-GDP ratio has continued to rise to an estimated 66.1 per cent by the end of 2015-2016, from 60.2 per cent in 2013-2014.”

The rating agency then argued that the Christie administration’s consolidation plans, and projections, were far too ambitious.

“The Government’s medium-term plan forecasts continued deficit reduction and a balanced budget by 2018-2019, on the back of strong revenue growth, mainly from VAT and a reduction of expenditures in real terms after 2016-2017,” Moody’s said.

“According to the authorities, this will lead to a reduction in the Government’s debt-to-GDP ratio, closer to 60 per cent of GDP.”

It added: “Moody’s baseline, which incorporates a more gradual fiscal consolidation path, forecasts that the debt-to-GDP ratio would peak in 2016-2017 at about 67 per cent, and then stabilise around 65 per cent.

“In addition, the Bahamian government has a moderate interest burden, with an interest-to-revenues ratio of about 13 per cent. These fiscal metrics point to somewhat limited fiscal space for the sovereign relative to Baa-rated peers, reducing the Bahamas’ capacity to respond to economic shocks.”

Moody’s called for the Government to “strengthen its budgetary processes”, adding that the introduction of spending controls and “improvements in revenue collections” could help boost the Bahamas’ credit rating.

“Upward rating momentum would also emerge if implementation of structural reforms fostered higher potential growth and contributed to a significant improvement in the Bahamas’ debt metrics, aligning these with ‘Baa’ medians,” Moody’s added.

With Moody’s prescribing stronger economic growth and fiscal restraint as the Bahamas’ medicine, it added: “Downward rating pressure could emerge if the Government’s commitment to fiscal discipline diminishes, delaying the stabilisation of debt metrics.

“Slower than anticipated economic growth, particularly if it lowered government revenue growth, a key component of the deficit reduction strategy, would also be credit negative. The rating could also be downgraded if the Government’s contingent liabilities, in the form of guaranteed debt of state-owned enterprises, were to crystallise on the Government’s balance sheet.”

However, Moody’s struck a positive note with its expectation that the Bahamas’ creditworthiness will stabilise at ‘Baa3’, hence its decision on the outlook.

“The stable outlook on the rating reflects Moody’s expectation that sovereign credit metrics will remain in line with a ‘Baa3’ rating, as fiscal consolidation will continue over the coming years, and that government debt metrics will likely stabilise in fiscal 2016-2017 as the deficit declines,” the rating agency said.

“The stable outlook also incorporates the expectation that economic performance will strengthen in 2016-2018, returning to levels close to the Bahamas’ potential growth of 1-1.5 per cent. Under this baseline, we would see a stabilisation of the Bahamas’ key economic and fiscal metrics, although these metrics would remain weaker than for most ‘Baa’ rating peers.”