Powerhouse credit ratings agency Moody’s has downgraded the government of The Bahamas’ ratings by two notches into junk status territory to Ba2 from Baa3, and changed the country’s economic outlook to negative, according to information from Moody’s site.
The world’s other leading credit ratings agency, Standard & Poor’s, already has The Bahamas in junk territory with a negative outlook.
Moody’s predicts a loss of over 50 percent of tourism inflows into the country in 2020, which, in their estimation, would lead to a contraction of GDP of about 16 to 20 percent.
The Ministry of Finance has predicted a contraction in GDP of 12 percent stemming from the fallout left by the novel coronavirus (COVID-19) pandemic.
Moody’s also expects The Bahamas’ debt burden to reach 85 percent of gross domestic product (GDP), and said downside risks will last about two years with a rating upgrade unlikely in the short-term.
According to Moody’s, this was its determination following the country’s latest review, which concluded April 9, 2020.
According to Moody’s, the action was taken because of the economic shock caused by the COVID-19 pandemic, which compromised the fiscal strength of the country.
The government intends to borrow an unprecedented $1.3 billion to fund a record fiscal deficit.
The government has said about 60 percent of that amount would come from external borrowing to bolster foreign currency reserves.
However, Moody’s expressed some concern about the country’s ability to continue accessing such large amounts through traditional financiers.
“There is also a risk that market sentiment towards The Bahamas does not improve enough to enable the government to finance its larger funding needs through 2021/2022,” Moody’s said.
Also a concern for Moody’s were constrained funding conditions for the government “because of larger financing needs”.
“The negative outlook reflects Moody’s expectation that given the severity of the coronavirus shock, the government’s credit profile will continue to be exposed to downside risks related to the recovery of the tourism sector,” Moody’s said.
“This could weigh on a consolidation process that Moody’s currently expects will begin in earnest in fiscal 2021/22. Additionally, given its higher borrowing requirements for fiscal 2020/21, the government could face more pronounced liquidity challenges than currently expected.
“Moody’s has today also lowered The Bahamas’ long-term foreign currency bond ceiling to Baa3 from Baa1 and long-term foreign currency deposit ceiling to Ba3 from Baa3. The short-term foreign currency bond ceiling was lowered to Prime-3 from Prime-2, whereas the short-term foreign currency deposit ceiling was lowered to Not Prime from Prime-3. The Bahamas’ long-term local currency country risk ceilings were lowered to A3 from A2.”
The long-term foreign currency bond ceilings for The Bahamas’ offshore banking center was lowered to A2 from Aa3, while the long-term foreign currency deposit ceiling remains at A2.
Moody’s added that the main shock concern exists in the “sharp decline and potentially prolonged slump in the tourism industry, which represents a sizable proportion of gross value added in the economy as well as a source of government revenue and export earnings”.
It added that COVID-19 presents a “social risk under its ESG framework”.
Much of the government’s 2020/2021 budget focuses on taking care of The Bahamian society’s most vulnerable.
Moody’s contends that “the large GDP contraction in 2020 will weigh on the fiscal accounts through the fiscal year that ends in June 2021”.
“Overall, The Bahamas’ fiscal strength will materially weaken relative to its prior Baa-rated peers,” Moody’s said.
Moody’s added that the government’s risk profile has also increased because of COVID-19 and the shock from Hurricane Dorian.
“The Bahamas’ credit profile will now be more vulnerable to climate-related events given its weaker balance sheet,” said Moody’s.
“The government has sought to renew some of the instruments that helped to mitigate the short-term financial impact caused by Hurricane Dorian. However, its more limited fiscal space could translate into heightened government and external liquidity pressures should market access become more constrained.
“Moody’s forecasts government borrowing needs will exceed 17 percent of GDP in 2020/21, above historical levels of about 7 percent of GDP. About 5 percent of GDP corresponds to principal repayments, most of which are due to reliable domestic sources. Moreover, because of the loss in tourism flows, The Bahamas’ external accounts will deteriorate in 2020 and lead to a reduction in its foreign exchange reserves.”
Recovery prospects
Moody’s explains in its release that hotels will likely not begin to see meaningful recovery until the fourth quarter of 2020, which would also depend on the recovery of the airline industry.
“The performance of the sector will also depend on the speed of the recovery of the airlines industry and ability to service tourist destinations such as The Bahamas,” said Moody’s
“That said, a recovery in 2021 to 60 to 70 percent of 2019 tourism flows could lead to a GDP expansion of over 10 percent in The Bahamas.
“Notwithstanding this expected increase, The Bahamas’ medium-term economic performance will likely remain subdued because of pre-existing structural constraints – such as weak credit growth, high energy costs and weak ease of doing business – which hinder the sovereign’s economic strength.”
According to Moody’s, the country’s outlook could be reverted to stable if the government is successful in financing its borrowing requirements for the 2020/2021 budget and tourism makes a meaningful recovery.
“Additionally, the implementation of fiscal and economic policies that support a fiscal consolidation process and the stabilization of the debt trend over the coming years would be credit-positive,” said Moody’s.
“Negative rating pressure would emerge should the government face heightened liquidity pressures that limited its ability to fund its larger fiscal deficits in 2020/21 and 2021/2022 and caused a more material decline in foreign exchange reserves. Finally, if prospects for debt trend stabilization beyond 2020/2021 were to weaken, due to poor economic growth or limited fiscal consolidation, additional credit-negative pressures would emerge.”
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source https://thenassauguardian.com/2020/06/26/moodys-predicts-gdp-contraction-of-up-to-20/
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