The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Standard & Poor’s (S&P) yesterday gave the Bahamas a ‘junk’ creditworthiness downgrade for Christmas, raising alarm that this nation’s economic and fiscal woes are taking it “over the precipice”.

S&P’s action, based on the Bahamas’ weaker economic growth and slower fiscal consolidation pace, means that this nation has lost its all-important ‘investment grade’ status with one of the world’s leading credit rating agencies.

The ‘one notch’ drop, from ‘BBB-/A3’ to ‘BB+B’, will immediately send a negative message to the world’s capital markets, and investors in both Bahamian government debt and this nation’s economy, potentially impacting every Bahamian.

An S&P spokesman, in an e-mail to Tribune Business, confirmed that the rating agency had effectively cut the Bahamas’ creditworthiness to ‘junk’ status.

Explaining what its action meant, he said: “The rating of BBB- is considered the lowest rating in ‘investment grade’, so the rating of BB+ (which is one notch below that) would be the highest rating in the ‘speculative grade’ category (which many in the market call ‘junk’ per your question, although we don’t use that term).”

S&P, in a report obtained by Tribune Business, justified the ‘junk’ downgrade on the basis that it is now projecting the Bahamian economy will only grow by 0.3 per cent this year, down from its 1.2 per cent estimate in April.

The rating agency added that lower GDP/economic growth would also negatively impact the Government’s tax revenues and fiscal consolidation plans, which were already progressing more slowly than expected.

Echoing the International Monetary Fund’s (IMF) recent warnings, S&P said government spending was still outpacing revenues despite Value-Added Tax’s (VAT) introduction, with Hurricane Matthew restoration costs set to inflict “further pressure” on expenditure in 2017.

“We expect Bahamian GDP to grow by only 0.3 per cent in 2016, on the back of a 1.7 per cent contraction in 2015, and grow 1.2 per cent on average over the next three years,” S&P said.

“At the same time, we believe that this lower growth trend will challenge the government’s ability to meet its fiscal projections, likely resulting in rising debt.

“The erosion of the Bahamas’ creditworthiness reflects these growing vulnerabilities within a context of a weak external position with growing levels of external debt, double-digit unemployment, high non-performing loans in the banking system, and high household indebtedness.”

S&P added that Baha Mar was unable to come to the Bahamas’ rescue in time to avoid a downgrade, effectively dismissing the $3.5 billion development’s economic impact for much of 2017.

“The country’s largest tourism project, Baha Mar, is set to open in phases beginning in 2017. We believe that it will take time before the resort is able to operate at full capacity,” the rating agency added.

Painting a grim picture of the Bahamas’ near-term economic and fiscal prospects, S&P said the Bahamas’ real GDP per capita growth was still likely to average -0.1 per cent over the next three years.

This followed a similar “negative average” over the previous decade, with S&P also projecting that the Government’s projected 1.3 per cent primary fiscal surplus for the 2015-2016 Budget year will instead be a 0.3 per cent deficit.

Describing the Bahamas as having a “record of poor economic growth”, S&P said: “Lower-than-anticipated growth, in addition to spending pressure following damage inflicted by the hurricane, will slow the pace of fiscal consolidation beyond our prior expectations for 2016 and 2017.

“While the Government had previously anticipated a primary fiscal surplus in 2015-2016 of 1.3 per cent of GDP, our own expectation was a 0.3 per cent primary surplus. However, we now expect a primary deficit of 0.3 per cent of GDP.”

The primary budget measures the difference between government revenues and recurrent expenditure (excluding interest payments on its debts).

S&P said that despite VAT boosting government revenues to the equivalent of 25 per cent of GDP in the 2015-2016 fiscal year, the benefits were being squandered by a rise in government spending to 29 per cent of GDP for that same period.

And, in stark contrast to the Government’s forecast, which projects a GFS fiscal surplus and shrinking national debt by the 2018-2019 fiscal year, S&P anticipates that these indicators will still be in deficit and rising, respectively.

“The Government’s fiscal consolidation efforts have largely focused on revenues - primarily through the successful introduction of the VAT in 2015, which helped boost general government revenues to an expected 25 per cent of GDP in the fiscal year ended in June 2016 from 20 per cent two years earlier,” S&P said.

“However, spending has continued to rise, and we expect general government expenditures to reach around 29 per cent of GDP in the fiscal year ended in June 2016, from 25 per cent in the 2013-2014 fiscal year.

“During the current fiscal year, ending in June 2017, we believe that there will be further pressure on spending,” the rating agency continued.

“Estimates place total damages inflicted by Hurricane Matthew above $600 million, or nearly 7 per cent of GDP, though this includes an estimated $400 million in insured losses to private property.

“Hurricane-related spending could further slow the pace of fiscal consolidation. We now expect the change in general government debt to GDP to reach 3.5 per cent in 2016 and 3.7 per cent in 2017, and then fall gradually thereafter, reaching 2.3 per cent by 2019.”

This means, though, that the national debt as a percentage of GDP will still be steadily increasing, with the direct charge hitting 63.2 per cent in 2019.

“Continued fiscal deficits will likely boost net general government debt toward 57 per cent of GDP in 2016, from 53 per cent in 2015, and reach 60 per cent by 2018,” S&P said.

“Additionally, once we include the debt of public sector enterprises, we expect gross debt to rise to 76 per cent of GDP in 2016. We also forecast general government interest payments to represent 12 per cent of general government revenues on average through 2019.”

Michael Halkitis, minister of state for finance, could not be contacted for comment last night.

However, in a statement the Government last night slammed S&P’s latest downgrade, saying it did not “fully consider” initiatives that were already underway to generate greater economic growth (see other article on Page 1B).

Its statement, though, did not identify any specific initiatives by name other than Baha Mar, indicating that all the Government’s growth and job creation hopes are pinned on the Chinese government and the project’s new owner, Chow Tai Fook Enterprises (CTFE).

The only bit of ‘good news’ for the Government was S&P’s decision to place a ‘stable’ outlook on the Bahamas and its credit rating, with the agency implying that - barring major negative shocks to the economy - no further downgrades are likely over the next two years.

And Moody’s, the other rating agency, is still keeping the Bahamas at ‘investment grade’, taking a more relaxed view on Baha Mar and the Christie administration’s fiscal consolidation efforts.

Private sector and political reaction to S&P’s unwanted ‘Christmas gift’ was swift, all interpreting it as a strong signal that the Bahamas rapidly needs to alter its fiscal and economic course.

Loretta Butler-Turner, the Opposition’s leader in the House of Assembly, responded: “Oh my God, this is not a good Christmas.

“This is striking at the heart of our country, the same way it hit me in my heart. We’ve obviously gone over that precipice that I’ve been talking about for some time.

“Unfortunately, for Bahamians it’s going to be even more difficult for us as a country to remain competitive in the financial field. The fact we have lost investment grade status is going to cost us in the future.”

Edison Sumner, the Bahamas Chamber of Commerce and Employers Confederation’s (BCCEC) chief executive, told Tribune Business: “It has to be seen as a real wake up call. It’s not good news for anybody.”

Mr Sumner agreed that S&P’s action was not unexpected, but said he and the Chamber had hoped “previous discussions” with the rating agencies (including Moody’s) and “things in the pipeline” would have prevented the ‘junk’ downgrade.

The Chamber chief executive acknowledged, though, that this was now akin to “looking through the rear view mirror”.

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

The Government will likely 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 ‘junk’ downgrade may also deter investors assessing the Bahamas as a place to invest, as it raises questions about the Government’s economic management.

“That has knock-on effect on the cost of capital across the board,” Kenwood Kerr, chief executive of Providence Advisors, told Tribune Business last night.

“The lowering of the credit rating causes [interest] rates to rise, especially for external borrowing. To the extent that’s used to support business growth and expansion, that’s going to be more expensive.

“It just raises the uncertainty, and with oil prices rising, it’s going to have a knock-on effect for us. It [S&P’s action] was not unexpected, but is not welcome. We need to address the underlying deficiencies in the economy and mobilise capital much more quickly.”