The Bahamas has been downgraded for a second consecutive year by global credit rating agency Standard and Poor’s (S&P Global) to B+ from BB-.
However, S&P Global gave a boon to the country’s financial prospects by moving the economic outlook from negative to stable.
Acknowledging the two large shocks to the economy in the past three years, notably Hurricane Dorian and the COVID-19 pandemic, S&P Global in the rating released on Friday, said it believes the country’s track record of slow progress in reforming public finances and key sectors of the economy has contributed to the weakening of its financial profile over many years and hurt its economic performance.
The move follows Moody’s Investors Service downgrading of The Bahamas’ long-term issuer and senior unsecured ratings to Ba3 from Ba2, while maintaining the negative outlook in September.
Nonetheless, S&P Global said it gave a stable outlook given the economic recovery presently underway in the tourism sector will reduce pressure on government expenditures, support revenue as well as a gradual decline in deficits, and continued but decelerated growth in national debt over the next year.
Under a worse-case scenario, S&P Global said the government’s inability to close budget deficits over the next 12 months, or if economic recovery lags, could mean a further downgrade.
On the upside, S&P Global said it could raise its rating by next year if the government “establishes a track record of enacting meaningful financial reform, demonstrating an ability to raise revenues and leading to sustained near-balanced financial results and improved economic prospects”.
“The Bahamas has faced two large negative shocks in three years, placing significant pressure on government finances and testing the government’s resolve to put the nation’s finances on a sustainable path,” the credit rating report read.
“The rapid increase in debt over the past few years means The Bahamas’ previous fiscal consolidation plans will likely be insufficient to meet the country’s debt targets without material new revenues, significant cost-cutting, or economic growth well above historical averages. Furthermore, the country remains vulnerable to environmental risks that elevate The Bahamas’ need for fiscal resiliency.
“The government suspended its fiscal and debt targets under the Fiscal Responsibility Act following Hurricane Dorian in September 2019. Although successive governments have continued to work on policies and legislation to support their fiscal responsibility mandate, they have not enacted material revenue measures or sustained expenditure cuts. We believe the new (Davis) administration will take time to assess the country’s fiscal and debt situation, which may further delay the implementation of new fiscal measures.
“We believe the country’s track record of slow progress in reforming public finances and key sectors of the economy has contributed to the weakening of its financial profile over many years and hurt its economic performance. Most notably, failure to advance public financial reform has led to a marked increase in the sovereign’s debt burden.”
Acknowledging the downgrade, Minister of Economic Affairs Michael Halkitis in a statement Friday pointed to what he called “the failure of the previous administration to implement meaningful fiscal reforms to existing revenue models and ill-conceived debt management strategies”.
Halkitis said, “The imprudent policy choices related to borrowing over the past four years have increased our external indebtedness despite the existing domestic capacity.”
The country’s debt burden has climbed by almost $2.4 billion in the past two fiscal years, S&P Global noted, and interest costs at up to 15 percent now represent about 21 percent of budgetary expenses.
Further, the agency forecasted The Bahamas’ net general government debt to reach 86.6 percent of gross domestic product (GDP) in 2021, up from 47.6 percent in 2019.
It said it expects the economy to increase by 3.7 percent in 2021, with a stronger recovery expected in 2022.
“An economic recovery is underway in The Bahamas, led by the resumption of tourism. The economy remains concentrated in the tourism sector, which typically contributes at least 40 percent of GDP,” the report stated.
“The most recent figures show that up to August 2021, stay-over arrivals were about 70 percent of pre-pandemic levels and are expected to continue building as the sector enters the important holiday season. We believe The Bahamas will benefit from its strong marketing presence and easy access for visitors from its main source market, the US.
“Despite fairly strong real GDP growth expected in 2021 and 2022 (3.7 percent and 8.6 percent, respectively), we believe it will take several years for nominal GDP to reach pre-pandemic levels.
“We expect GDP per capita will be $27,300 in 2021. The pandemic, low historical growth, and repeated natural disasters have weighed on the country’s economy. Despite strong growth over the next two to three years, our assessment of the sovereign’s creditworthiness reflects its below-average historical growth performance compared with that of others at a similar level of development.”
In addition to the lowered credit rating, S&P Global revised its transfer and convertibility assessment to BB- from BB.
Noting that the country has significant financing and refinancing needs, S&P Global said it expects The Bahamas will post another significant budget deficit this year for a third time in a row.
“We expect the fiscal deficit this year (ending June 30, 2022) will be 8.7 percent of GDP, down from 15.4 percent in the previous year. We also expect that the change in general government net debt will average 4.2 percent of GDP during 2021-2024,” the agency said.
“In the short term, we do not anticipate meaningful new revenue measures. We believe a recovering, but still weak, economy could limit the government’s ability to raise meaningful revenues in the short term.
“The government’s immediate plans include a reduction in the value-added tax (VAT), in tandem with a broadening of the base, which we understand is intended to be revenue neutral. The government plans to pursue additional revenue via a dedicated Revenue Enhancement Unit to improve tax collections.
“The government has not announced any new revenue streams, and we do not expect new taxes will be implemented imminently. Instead, the government has announced two new committees to review revenue policies and public debt strategy. We expect any recommendations and new policies arising from these committees will take several years before they have a meaningful impact on public finances.”
Prime Minister and Minister of Finance Philip Brave Davis previously said that immediately upon gaining office, he and his technical advisors reached out to global financial agencies including Moody’s and S&P Global to update them on this administration’s debt management strategy and revenue enhancing methods.
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source https://thenassauguardian.com/downgraded-2/
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