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Rating Action:

Moody's Downgrades Sint Maarten's issuer rating to Baa2 with a stable outlook

04 Apr 2016

New York, April 04, 2016 -- Moody's Investors Service has today downgraded Sint Maarten's issuer rating to Baa2 from Baa1. The outlook on the rating is stable.

The key drivers for the downgrade are:

1. Slower than expected progress in development of institutional strengths including fiscal and monitoring capabilities in the aftermath of its independence from the Netherlands in 2010.

2. Sint Maarten's slow economic growth which limits the country's ability to manage adverse external conditions.

The stable outlook reflects our expectation that fiscal support from the Netherlands (Aaa stable) will limit significant increases to Sint Maarten's debt burden.

Sint Maarten is part of the Caribbean island of Saint Martin, the other half being French territory. Prior to 2010 Sint Maarten was part of the Netherlands Antilles. On 10 October 2010 it became a constituent country of the Kingdom of the Netherlands.

Concurrently, Moody's has lowered the local-currency bond and deposit ceilings to A2 from A1, and the foreign-currency bond ceiling to A3 from A2. The foreign-currency deposit ceiling was also lowered to Baa2 from Baa1.

RATINGS RATIONALE

RATIONALE FOR DOWNGRADING THE RATING TO Baa2 FROM Baa1

FIRST DRIVER: SINT MAARTEN'S LIMITED PROGRESS DEVELOPING ITS OWN FISCAL INSTITUTIONS

Since independence in 2010 Sint Maarten has, and continues to, benefit from support from the Netherlands in the form of low interest long term financing and fiscal oversight. This support was designed to be reduced or eliminated once Sint Maarten developed its own fiscal institutions. But Sint Maarten has shown limited progress in meeting all the necessary requirements which has delayed the development of its own fiscal framework and oversight mechanism.

Fiscal performance in Sint Maarten is reviewed and controlled by the College Financieel Toezicht (CFT), established as part of the breakup of the former Netherlands Antilles. The CFT oversees Sint Maarten's compliance with existing fiscal rules, including limiting interest payments to 5% of public sector revenues, a balanced current fiscal account and timely approval of the budget. Debt issuance by Sint Maarten also requires CFT approval.

CFT oversight is instrumental in limiting debt build up and Sint Maarten's debt burden, at 26% of GDP in 2015, is lower than the 41% Baa median. But establishing a credible successor to the CFT is a crucial credit challenge for Sint Maarten. Since 2011 the budget has been rejected several times by the CFT, and that led to a decision to extend the CFT's mandate to 2018, from the original 2015. While the extension ensures continued fiscal surveillance it also highlights the difficulties Sint Maarten has faced in creating and maintaining its own fiscal institutions.

SECOND DRIVER: SINT MAARTEN'S SLOW ECONOMIC GROWTH

Sint Maarten's 2015 $28,221 per capita GDP is higher than that of most peers, but the country's average real growth rate of 0.5% over the last five years is one of the lowest among Baa-rated sovereigns. In addition, Sint Maarten's US$1 billion economy is the second smallest among all rated sovereigns, heavily dependent on tourism, and susceptible to weather-related shocks. Unlike other high income Caribbean islands such as the Bahamas and the Cayman Islands, Sint Maarten lacks an offshore financial sector and efforts to diversify the economy build on the existing tourism-related infrastructure and Sint Maarten's role as a regional hub for cruise tourism.

Tourism represents about 80% of Sint Maarten's GDP, including domestic demand and construction. The cruise industry alone represents 35% of GDP. As a mature industry, tourism is unlikely to lead to sustained high growth although the small size of the economy means that a single major project can have a large and measurable impact on domestic output. In the years after the global financial crisis, tourist arrivals had declined by an average of 0.5% annually. Growth in stay-over tourism increased at a slower pace in 2015 compared to 2014, and cruise tourism contracted. The slowdown in cruise tourism resulted from a decrease in the number of cruise ships that visited Sint Maarten in 2015.

Sint Maarten is prone to weather shocks and a future major storm could place strong pressure on the fiscal and debt numbers, a risk heightened by the expected reduction in direct support from the Netherlands. However, the country's high per capita GDP supports its ability to quickly rebuild and adapt in the aftermath of a major natural disaster.

WHAT COULD MOVE THE RATING UP/DOWN

A sustained and permanent reduction of debt metrics, together with clear evidence of policy continuity and institutional strengths even in the absence of external oversight could lead to upwards ratings pressure.

A persistent increase in debt metrics could lead to downwards ratings pressure; reduced external support without an equivalent increase in domestic institutional strength could also lead to a downgrade.

GDP per capita (US$): 27,749 (2014 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 0.3% (2015 Estimate) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0% (2015 Estimate)

Gen. Gov. Financial Balance/GDP: -1.3% (2015 Estimate) (also known as Fiscal Balance)

Current Account Balance/GDP: -2.6% (2015 Estimate) (also known as External Balance)

External debt/GDP: 26.3% (2015 Estimate)

Level of economic development: Low level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 30 March 2016, a rating committee was called to discuss the rating of the St. Maarten, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially decreased. The issuer's institutional strength/framework, have materially decreased. The issuer's governance and/or management, have materially decreased. The issuer has become increasingly susceptible to event risks. An analysis of this issuer, relative to its peers, indicates that a repositioning of its rating would be appropriate.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gabriel Torres
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Anne Van Praagh
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Downgrades Sint Maarten's issuer rating to Baa2 with a stable outlook
No Related Data.
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