New York, December 14, 2012 -- Moody's Investors Service has downgraded the rating of the government
of the Bahamas to Baa1 from A3. The rating outlook remains negative.
Key drivers of this rating action are:
1. Limited growth prospects following a protracted recession and
weak recovery in tourism and construction
2. Significant and rapid deterioration of the government's balance
sheet, exacerbated by a low revenue base
3. High and rising levels of debt and a weakening of debt sustainability
metrics relative to peers
RATING RATIONALE
The economy contracted at an average rate of 0.8% annually
between 2007 and 2011 and Moody's expect the post-crisis recovery
to remain fragile. Tourism, offshore financial services,
and construction sectors - the main drivers of economic activity
- continue to face downside risks, exacerbated by an uncertain
recovery in the US, the Bahamas' main tourism market.
The downgrade incorporates a marked deterioration of the government's
financial balance over the past five years. Expenditure growth
has continued following the election of a new government in May 2012,
and the state plays an increasingly dominant role in the economy through
elevated levels of capital spending on public works projects, social
safety net transfers, public sector employment, and increased
budgetary support to public sector corporations. This fiscal stimulus
program is yet to yield growth dividends and unemployment remains close
to 15%, depressing domestic demand.
We see limited prospects for the fiscal consolidation necessary strengthen
the government's balance sheet and stabilize debt levels.
The Bahamas has a limited revenue base and the government relies disproportionately
on volatile trade-related tax revenue and property taxes.
A one-time revenue windfall from the divestment of the Bahamas
Telecommunications Company eased financing needs in 2011 and stamp duties
on several large tourism projects financed by foreign investment compensated
for a decline in recurrent revenue in 2011, but these developments
will not be credit supportive going forward.
We do not expect reforms necessary to increase recurrent revenues,
most importantly the introduction of a value-added tax and a modernization
of the property tax system, to materialize before 2014/15.
The government plans to gradually reduce capital spending starting in
2013, but increased current expenditure outlays on social transfers
will be more difficult to retrench while growth prospects remain subdued.
As a result of expanding financing needs, the central government's
debt level rose to 53% of GDP in 2012 from 31.7%
in 2007 and debt sustainability metrics have deteriorated relative to
A-rated peers. The combination of historically high debt
levels and large fiscal deficits has left the government with limited
fiscal buffers to effect further stimulus or respond to external shocks.
WHAT COULD CHANGE THE RATING DOWN
We expect the government to find it difficult to rationalize spending
and achieve the fiscal consolidation necessary to stabilize the debt and
place it on a sustainable trajectory in the near term. While the
pace of increase in government debt ratios is likely to slow in the coming
years, a failure to reverse the recent trend of rising debt will
place downward pressure on the Bahamas' rating. In addition,
the crystallization of contingent liabilities from debt held by public
sector corporations such as the loss-making Bahamas Electricity
Corporation could adversely affect the rating. A further deterioration
of the public sector balance sheet due to external shocks in the form
of weather-driven events like hurricanes will also be credit negative.
WHAT COULD CHANGE THE RATING UP
Revenue-side reforms will be a key ingredient to stabilizing the
ratings outlook. Enhancements to public infrastructure, in
combination with a number of new tourism developments expected to significantly
expand capacity in next 12-24 months, will be credit positive
if they translate into an improvement in the growth outlook. Finally,
a continued recovery in the US will be critical to support the rating.
CEILINGS
As part of this rating action, Moody's has made the following
adjustments to ceilings for corporate and structured ratings, as
well as offshore banks:
Foreign Currency Bond Ceiling -- A2
Foreign Currency Deposit Ceiling -- Baa1
Local Currency Country Risk Ceiling -- A1
Offshore Banks - Foreign Currency Bond Ceiling -- Aa3
Offshore Banks - Foreign Currency Deposit Ceiling -- A2
The A1 local currency country risk ceiling reflects the maximum credit
rating achievable in local currency for a debt issuer domiciled in the
country. The foreign currency bond country ceiling of A2 and the
Baa1 ceiling for foreign-currency bank deposits are lower than
the local currency ceiling as they also capture foreign currency transfer
and convertibility risks.
METHODOLOGY
The principal methodologies used in this rating were Sovereign Bond Ratings
Methodology published in September 2008 and Local Currency Country Risk
Ceiling for Bonds and Other Local Currency Obligations published in August
2012. Please see the Credit Policy page on www.moodys.com
for a copy of these methodologies.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant 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
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the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Edward Al-Hussainy
Asst Vice President - Analyst
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
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Downgrades The Bahamas Government Rating to Baa1, Maintains Negative Outlook
