The Tribune

By RASHAD ROLLE

Tribune Staff Reporter

rrolle@tribunemedia.net

AS Moody’s prepares to review the Bahamas’ creditworthiness following the Minnis administration’s revelations about the country’s fiscal condition, former Central Bank Governor James Smith warned that a downgrade to ‘junk’ status would raise the cost of borrowing, increase the current costs of debt servicing and potentially scare off investors.

Meanwhile when questioned about the looming review and possible downgrade yesterday, Prime Minister Dr Hubert Minnis would only say the government “must exercise fiscal prudence” in the way it runs the country’s affairs.

Moody’s, which declined to downgrade this country’s bond and issuer ratings earlier this year even though Standard & Poor’s did so in late 2016, said in a statement last week its decision to review this country’s Baa3 rating was prompted by official remarks that the country’s “fiscal position was weaker than previously estimated” and the “government’s debt ratios will continue to worsen over the coming years.”

The country now faces a downgrade of its creditworthiness to ‘junk’ status. Moody’s had expected that the government’s debt ratios would stabilise this fiscal year.

Currently, the government’s debt/GDP ratio is an estimated 72 per cent of GDP.

During its review, Moody’s will assess the government’s fiscal consolidation plan.

“In addition to the proposed expenditure and revenue measures that the government will seek to implement to reduce the fiscal deficit, Moody’s will assess measures to address the rising sovereign risk posed by contingent liabilities stemming from the broader non-financial public sector, which a stock of debt representing over 17 per cent of GDP, of which about half carries an explicit government guarantee,” Moody’s noted.

Mr Smith, who served a minister of state for finance in the first Christie administration, said while Moody’s might decide to give the new administration a chance to implement its plans, it will be very difficult for the government to persuade the credit rating agency not to give the country a downgrade.

The consequence of a downgrade, he said, is that it will be costlier for the state to do business.

“Every outstanding debt we have now will cost you more,” Mr Smith said. “Many of them are adjustable rates tied to rating agencies. So, if they say we’re at junk status, you’re going to pay junk interest rates.”

Mr Smith said Moody’s likely interpreted revelations during the budget debate as evidence that it missed important information when it last assessed this country’s fiscal condition and declined to downgrade the country’s rating.

“They have a reputation to manage,” he said. “They already published projections and now you’re telling them ‘oh you guys got it wrong.’ That has a lot of implications. The government, by publicising these things in such a dramatic fashion, is forcing them to take a second look; ordinarily they would’ve waited to see what the new government proposes and implements. A downgrade would mean it would be much more difficult to get inward investments and more expensive to get loans. It’s sending a signal to the world that our economy is not stable and not growing.”

In February, when it last assessed the country, Moody’s spared the Bahamas a downgrade but warned that if the government’s commitment to fiscal prudence diminishes, the country’s credit rating could be lowered.

The Christie administration was in office at the time.

Moody’s currently rates the Bahamas’ sovereign creditworthiness at ‘Baa3’ with a stable outlook, keeping it at one notch above ‘junk’ status following a previous downgrade in August 2016.