S&P projects 150% jump in gross external financial needs of public, financial sectors

In a damning outlook in which it lowered the country’s currency sovereign credit rating once again, global ratings agency Standard and Poor’s projected that the gross external financial needs of the public and financial sectors will be 352 percent of current account receipts in 2020 – an increase of more than 150 percent.

The Bahamas’ rating was lowered to ‘BB-’ from ‘BB’, resulting in a negative economic outlook.

Looking at this jurisdiction’s performance profile, S&P’s fiscal projections were virtually in line with government’s projection of a debt to gross domestic product (GDP) ratio of 69.5 percent, after what it projected would be a sharp contraction in tax collection and given that a weak economy could limit the government’s ability and willingness to raise revenue through additional tax measures.

“The fiscal deficits will propel the government’s net debt burden to about 69.5 percent of GDP by the end of 2021, while interest payments will remain above 15 percent of government revenues for three or more years. We expect The Bahamas will finance its deficit with a combination of domestic and external borrowing. In the past few years, most government borrowing has been from domestic institutions; however, commercial banks’ exposure to the public sector is now close to 20 percent of their assets and they might have less ability or appetite to absorb additional exposure. The government has to fund sizable projected fiscal deficits of $1.3 billion in fiscal 2020-2021 (12.4 percent of GDP) and $813 million (7.0 percent of GDP) in 2021-2022. In October, it issued a $600 million external bond,” S&P stated in its country overview, released yesterday.

“The government has funded most of its 2020-2021 deficit externally through a combination of bonds, bank lending and multilateral institutions. It has already issued a $600 million bond and borrowed $240 million from multilateral institutions. Although external financing helped support The Bahamas’ foreign exchange reserves, it raised the country’s external indebtedness. We expect the external debt of the public and financial sectors, net of usable reserves and financial sector external assets, will be about 117 percent of current account receipts in 2020. These figures include the government’s $2.25 billion in external bonds, but do not include the external debt and foreign direct investment in the islands’ substantial tourism sector.”

S&P stated it expects a 7.1 percent averaged change in general government debt over the next three years to 2023 and specifically by 4.9 percent during 2022-2023.

Pointing to the country’s large banking sector, S&P noted it expects further stressors given that limited monetary and exchange rate flexibility constrains the country’s ability to respond to external shocks.

“Based on the gross external liabilities of the country’s large banking sector, we expect the gross external financial needs of the public and financial sectors will be 352 percent of current account receipts in 2020, up from about 200 percent in 2019. This also reflects the high current account deficit, in part due to the significant decline in tourism receipts and the financial sector’s high rollover needs,” the ratings agency pointed out.

“However, we consider the financial sector’s external assets highly liquid, which somewhat diminishes liquidity risk. Errors and omissions also contribute to a weak external profile. Errors and omissions have historically been high and tend to fluctuate.“

Noting The Central Bank of The Bahamas’ recent move to ease access to foreign currency and external financing for entities with foreign currency inflows, S&P stated the limited nature of this measure and restriction to sectors that generate foreign currency should dampen the impact on the country’s external accounts.

“Loss of correspondent banking relationships remains a risk for The Bahamas, as it does for many of the Caribbean sovereigns we rate. Although we do not believe that this trend will threaten the banking sector’s ability to roll over its debt, we do think that it could further stress the financial system. We believe this highlights the importance of the central bank’s new anti-money laundering/counter-terrorist financing supervision regime, which should strengthen compliance and assist in the maintenance of the system’s correspondent banks,” the international watchdog noted.

“We consider banking sector contingent liabilities limited, given the size of the sector, with assets estimated to be about 136 percent of GDP. The financial sector is dominated by foreign subsidiaries of Canadian banks, which comprise about two-thirds of domestic assets. At the onset of the pandemic the commercial banking sector as a whole had strong capital and liquidity ratios. Nevertheless, the severe external shock could erode the asset quality and profitability of those banks exposed to the tourism sector, particularly as banks work to resolve the forbearance offered to borrowers at the onset of the pandemic.”

S&P stated it could revise the country’s outlook to stable over the next 12 months if risks of a more severe or prolonged COVID-19 outbreak were to subside and the country’s economy and finances stabilized.

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source https://thenassauguardian.com/sp-projects-150-jump-in-gross-external-financial-needs-of-public-financial-sectors/