S&P affirms Bahamas’ B+ credit rating with stable outlook

S&P affirms Bahamas’ B+ credit rating with stable outlook

NASSAU, BAHAMAS — Credit ratings agency Standard & Poor’s (S&P) has affirmed this nation’s ‘B+’ sovereign credit rating with a stable outlook, noting that the Bahamian economy has seen meaningful improvement over the past 12-18 months due to the tourism sector’s performance.

The ratings agency noted that the Bahamian economy is recovering after two successive exogenous shocks, led by a strong rebound in tourism, and the government’s fiscal balances are returning to pre-pandemic levels. Nevertheless, it said that the country faces challenges as global growth slows, which could delay the government’s realization of its fiscal and debt targets.

“Furthermore, external financing risks remain elevated for The Bahamas, but a large domestic financial sector and multilateral external funding should mitigate this risk.” said the agency.

S&P said that its stable outlook reflects the view that economic growth will support government revenues and reduce pressure on government expenditures, leading to smaller fiscal deficits over the next 12 months. 

“The stable outlook also assumes no material adverse impact on The Bahamas, including to the local banking sector, from the recent bankruptcy of FTX, a crypto-currency exchange with a presence in the country. We expect continued, but decelerating, growth in the national debt. We expect the country’s relatively large financing needs will be met by the domestic market and multilateral lenders,” the ratings agency said. 

S&P warned that it could lower the ratings over the next 12 months should economic performance lag, pointing to GDP per capita remaining below its expectations and the possibility that external liquidity could deteriorate “sharply and suddenly”.

For it to raise the ratings over the next 12 months, the agency said the government would have to advance faster than expected, as well as “establish 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.”

Giving its rationale for its rating action S&P said: “There has been a meaningful improvement in The Bahamas’ economy over the past 12-18 months, spurred by the important tourism sector, although it remains below pre-pandemic levels. The expanding economy is supporting government revenues, which increased almost 29 percent in the most recent fiscal year, while higher employment is shrinking the government’s social expenditures. Deficits have fallen to six percent of GDP in fiscal year 2022 from 13.7 percent in fiscal 2021, and are expected to fall even further in the current fiscal year.”

It added, “Although The Bahamas’ debt burden rose following  Hurricane Dorian and the onset of the COVID-19 pandemic, a growing economy and smaller deficits have resulted in slower growth in debt. Interest expenses are higher than pre-pandemic levels and we expect the country’s interest burden will remain above 15 percent of revenues over the next one-two years. The government’s external liabilities are increasing, and we believe the country remains vulnerable to external shocks, while the fixed exchange rate limits its monetary policy flexibility.”

The ratings agency highlighted that the economy is expected to increase by eight percent in 2022, with slower growth expected in 2023.

“We do not expect significant public finance reforms in the next one-two years. Instead, the economic recovery is expected to be the main cause of improving deficits. As expected, The Bahamas is experiencing a strong recovery in the tourism sector; the country is benefiting from its proximity to its largest tourism source market and pent-up demand.

“Stayover arrivals for 2022 are expected to exceed 80 percent of 2019 levels. Furthermore, we understand there is a pipeline of tourism-related projects planned and underway over the next few years. Although we expect these projects will continue to support growth, they reinforce the economy’s dependence on the volatile tourism sector. The Bahamas’ economy remains concentrated in tourism, which typically contributes at least 40 percent of GDP.”

S&P said that it expects that global economic challenges in 2023 will slow The Bahamas’ real GDP growth next year to 1.1 percent.