The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Moody’s has voiced fears about The Bahamas’ continued access to capital markets and high interest burden if it is unable to successfully refinance maturing bond issues in four consecutive years from 2024 onwards.

The credit rating agency, in an opinion accompanying its Friday downgrade that pushed The Bahamas’ creditworthiness further into ‘junk’ status, warned that a failure to set the Government’s finances back on a sustainable path will increasingly force it into foreign currency borrowing and magnify its liquidity risks regarding the willingness of lenders to provide funding.

“While we expect the Government to meet its financing needs in fiscal year 2021-2022 without upward pressure on borrowing costs or liquidity risk, in the absence of fiscal consolidation as envisioned by the Government’s medium-term fiscal outlook, a continued reliance on international bond issuance will increase liquidity risks,” Moody’s said.

“The Government will need to refinance maturing international bonds in 2024 and in 2026, when the Government will see four consecutive years of maturing international bonds. Rolling over these maturing bonds at higher interest rates would not only add to the Government’s already high interest burden, but could lead to increased liquidity pressure if the Government loses market access.”

Moody’s warning came one day after Marla Dukharan, the former Royal Bank of Canada (RBC) chief economist, predicted to a regional seminar organised by the Trinidad-based Arthur Lok Jack Business School that the Bahamas will be the next Caribbean nation to default on its debt and enter an International Monetary Fund (IMF) adjustment programme.

While her prediction that this would occur within 12 months of the COVID-19 pandemic’s start never happened, Ms Dukharan said: “The Bahamas is having what many consider to be a landmark election today (Thursday), and I wish them well in securing a government that has the country’s best interests at heart.

“They have been, in The Bahamas, hit by their country’s two most severe crises in their history, Hurricane Dorian and the pandemic, within a six-month timeframe. This has, as you might imagine, had major socio-economic implications, which is no fault of the current [Minnis] administration.

“It was unfortunate timing for them, but which in my opinion will lead The Bahamas to default on and restructure its debt within an IMF programme in the very near future.”

Meanwhile, Moody’s said stopover tourist arrivals for the five-month period between April to August 2021 amounted to 55 percent of their pre-COVID levels in 2019. “The Bahamas tourism sector – a key sector in terms of growth, employment and earnings – began to recover in the second quarter of 2021, continuing into the third quarter,” the rating agency said.

“Stopover arrivals in the period April to August 2021 were 55 percent of those in April to August 2019. The recovery is driven by pent-up demand for travel in the US, the key source market for tourist arrivals to The Bahamas.

“The combination of increased vaccination rates in the US and close proximity to the US, and multiple flight options, have also supported strong demand for travel to The Bahamas. In addition, the average length of a trip to The Bahamas and the amount spent has increased, a reflection of the higher-end tourism product recovering more quickly than other tourism segments,” Moody’s continued.

“We expect The Bahamas’ tourism industry to drive real growth of 8 percent in 2021 following a 15 percent contraction in 2020. Assuming a further recovery in 2022, driven mainly by increased vaccinations and greater comfort with international travel, we expect The Bahamas to experience another year of very high growth rates in 2022.”

Turning to the fiscal situation, Moody’s added: “Our expectations for fiscal consolidation are similar to the Government’s and we expect the deficit to narrow to 7.2 percent of our forecast fiscal year GDP, before narrowing further in fiscal year 2022-2023.

“Fiscal consolidation over these two years will be driven primarily by a reduction in spending, including the removal of pandemic-related expenditures. In fiscal year 2020-2021, the Government introduced spending cuts of 20 percent on recurrent expenditures excluding salaries and interest costs across ministries.

“These spending cuts were intended to accommodate pandemic-related spending, which the Government estimates at $273.3m (2.5 percent of GDP) in fiscal year 2020-2021. We assume that some of these spending cuts will become permanent as ministries continue to work with smaller budgets even after the pandemic-related spending ends.”

Moody’s said more than 80 percent of the Government’s financing needs in the current 2021-2022 fiscal year will come from external or foreign sources, including a $700m foreign currency bond of which $200m will be guaranteed by the Inter-American Development Bank (IDB).

“Based on its projections for further fiscal consolidation, the Government anticipates government debt will peak at 88.9 percent of GDP in fiscal year 2021-2022 before steadily declining to 78.1 percent of GDP by fiscal year 2024-2025,” it added.