FURTHER INTO ‘JUNK’: Moody’s downgrades The Bahamas’ ratings to Ba3, negative outlook

Moody’s projects return to pre-COVID tourism levels “only by 2024 at the earliest”

NASSAU, BAHAMAS — Fresh on the heels of Thursday’s general elections, global credit rating agency Moody’s slashed this nation’s creditworthiness yesterday.

The country’s sovereign ratings have been downgraded to ‘Ba3’ from ‘Ba2’, highlighting the daunting economic and fiscal realities facing the nation and the new Davis-led administration.

Moody’s pointed to a significant erosion of the country’s economic and fiscal strength brought on by the COVID-19 pandemic.

“The duration and severity of the coronavirus shock have fundamentally weakened The Bahamas’ credit profile with lasting consequences in terms of a higher debt burden and weaker debt affordability as well as reduced economic strength,” read the rating agency’s report.

“Real GDP contracted by 14.5% in 2020, with the tourism industry most severely affected by a shutdown that lasted for most of the year. Despite the uptick in tourism activity in recent months, The Bahamas faces prospects of a slow economic recovery and one that remains vulnerable to potential future variants of the coronavirus. Moody’s expects stayover tourist arrivals to return to 2019 levels only by 2024 at the earliest.”

Moody’s underscored the nation’s economic recovery is highly dependent on a rebound in tourism activity. The sector contributed to 19 percent of GDP in 2019, and that contribution stood at around 40 percent when including related industries such as transport and accommodation, and food service.

“The severity of the economic contraction contributed to a significant increase in The Bahamas’ debt and interest burdens, which are now significantly higher than Ba-rated peers,” the downgrade report read.

“The Bahamas’ debt burden was already higher than Ba-rated peers prior to the pandemic and will remain above similarly rated peers as the economy recovers only slowly from the pandemic. Fiscal consolidation driven by the removal of COVID-related spending on unemployment benefits and other related items, along with a revenue recovery will support fiscal consolidation, which will reduce the debt burden gradually.

“The Bahamas’ debt burden will remain close to 80% of GDP by the end of FY2022/23 (fiscal year ending 30 June 2023), well above the Ba3-rated median (60%). Moreover, The Bahamas’ narrow revenue base means its debt measured by the debt-to-revenue ratio, which stood at 509% at the end of FY2020/21, will also remain significantly higher than the Ba-rated median of 266%.

The combination of a rising debt burden and a decline in revenue contributed to a further worsening of debt affordability, with the interest-to-revenue ratio increasing to 23% in FY2020/21 compared with 16% in FY2019/20. Moody’s expects the interest-to-revenue ratio to peak in FY2021/22, but to remain above 20% over the subsequent three years, and significantly higher than rated peers.

Moody’s underscored the country’s captive domestic investor base and long maturity profile provided a favorable debt structure despite recent increases. It furthered the country had a relatively strong institutional framework, a stable political system, and a fiscal policy framework that is more responsive to economic shocks.

Moody’s noted The Bahamas stands out among similarly rated peers because of its comparatively high level of GDP per capita, which supports its debt-carrying capacity.

The report continued: “A slower pace of fiscal consolidation that contributes to tightening financing conditions and a rise in borrowing costs, which would challenge the government’s ability to finance fiscal deficits and maturing debt would likely lead to a further downgrade.”

The rating agency said an upgrade was unlikely given the negative outlook, adding that the implementation of policies that support a fiscal consolidation process to sustainably reduce government debt could likely result in a return to a stable outlook.

It also pointed to an improvement in debt affordability by relying more on lower-cost domestic and external official sources of funding over more expensive external market issuance, as another path to greater stability.