New York, February 21, 2019 -- Moody's Investors Service ("Moody's") has today changed the outlook to
stable from negative on the Government of The Bahamas' ratings and
affirmed the issuer and senior unsecured ratings at Baa3.
The change in outlook to stable reflects Moody's view that The Bahamas
has made important progress in strengthening its fiscal policy framework
and transparency through the introduction of fiscal rules and more frequent
and in-depth reporting of the fiscal accounts. Additionally,
Moody's considers that continued fiscal consolidation will support
the stabilization of government debt metrics.
The affirmation of The Bahamas' Baa3 ratings considers that,
despite increased government debt ratios in recent years, these
indicators are in line with those of Baa-rated peers. Additionally,
while The Bahamas' credit profile is constrained by its growth potential,
high wealth levels enhance the economy's shock absorption capabilities
and measures recently adopted by the authorities will improve The Bahamas'
ability to respond to climate-related shocks, a key underlying
credit vulnerability.
The Bahamas' long-term foreign-currency bond ceiling
is unchanged at Baa1. Its long-term foreign-currency
bank deposit ceiling is unchanged at Baa3. The short-term
foreign-currency bond and bank deposit ceilings remain unchanged
at P-2 and P-3, respectively. The long-term
local currency country risk ceilings are unchanged at A2.
RATINGS RATIONALE
RATIONALE FOR THE CHANGE IN THE OUTLOOK TO STABLE FROM NEGATIVE
PROGRESS MADE IN STRENGTHENING THE FISCAL POLICY FRAMEWORK AND INCREASING
TRANSPARENCY
In Moody's view, the government has made important progress
in addressing deficiencies in The Bahamas' fiscal framework.
Over the past few years, continued revisions to budgetary outcomes
and the revelation of large arrears undermined fiscal policy credibility
and effectiveness, which in turn contributed to a deterioration
in The Bahamas' fiscal position.
The authorities have taken steps to bolster the institutional arrangements
that guide fiscal policy while simultaneously increasing transparency.
The government passed the Fiscal Responsibility Act (FRA) last year.
The FRA established a set of fiscal rules that include (i) a medium-term
deficit target, (ii) a government debt limit, and (iii) increased
reporting requirements. Additionally, a Disaster Relief Fund
was created, which Moody's expects will provide the government
with a financial buffer to respond to climate shocks.
The government has begun publishing quarterly budgetary performance reports,
as well as its first annual fiscal strategy report, which provides
a medium-term assessment of The Bahamas' fiscal accounts
and supports budget preparation efforts. In Moody's view,
this is a significant improvement with respect to previous reporting practices
and demonstrates the authorities' commitment to adopt international
reporting standards for the fiscal accounts. Additional efforts
will bolster fiscal policy credibility including the government's
decision to transition to accrual accounting over the coming years.
Overall, these measures will strengthen the fiscal policy framework,
increase accountability and improve public financial management,
enhancing the government's ability to respond to shocks.
CONTINUED FISCAL CONSOLIDATION WILL CONTRIBUTE TO THE STABILIZATION OF
DEBT METRICS
Moody's expects the government will continue to reduce the fiscal
deficit over the coming years. The deficit fell to an estimated
3.3% of GDP in 2017/18 from 5.5% in 2016/17
-- the highest level over the past decade -- even as the government
cleared arrears equivalent to 1.6% of GDP. Fiscal
rules state that the deficit has to fall to 1.8% of GDP
in 2018/19, 1.0% in 2019/20 and 0.5%
in 2020/21. The fiscal consolidation strategy involves an increase
in revenue -- through measures that include a higher rate for the
value-added tax -- and reining in current expenditure growth.
Because the government has yet to build a track record of compliance with
the new fiscal rules, Moody's baseline scenario incorporates
a more gradual fiscal deficit reduction than the one envisioned by the
rules. Nevertheless, under Moody's baseline,
government debt ratios would stabilize at a level in line with the median
for The Bahamas' Baa-rated peers.
RATIONALE FOR THE RATING AFFIRMATION AT Baa3
The Bahamas' debt-to-GDP ratio rose to 58%
in 2017/18 from 43.9% in 2012/13. However,
Moody's expects the debt ratio to stabilize, coming in line
with the Baa median by 2020. Thereafter, contingent on the
government's compliance with the fiscal rules, the debt ratio
will start to decline, moving toward the 50% of GDP medium-term
target. In terms of debt affordability, Moody's expects
revenue-enhancing measures implemented by the government to contribute
to a decline in The Bahamas' interest-to-revenue ratio.
However, at over 12%, the interest burden will continue
to exceed the Baa category median of 8.5%.
The Bahamas' economic growth -- estimated to average 1.7%
in 2017-20 -- lags most peers, with the Baa median at
3.5%. Growth is constrained by structural factors
including high energy costs, weak ease of doing business and low
credit growth. Even though the government is taking steps to address
these issues, Moody's expects that results will only materialize
in the medium term. On the other hand, The Bahamas has shown
economic resilience to climate-related shocks. Factors supporting
this resilience include comparatively high income per capita and the quality
of infrastructure in its main economic center. These elements have
allowed The Bahamas to better absorb shocks caused by hurricanes relative
to other islands in the Caribbean.
A factor that will help mitigate the fiscal impact of these types of shocks
is the accumulation of financial buffers. The buildup of assets
in the Disaster Relief Fund over the coming years toward a level closer
to 2%-4% of GDP -- contingent on the government
complying with the fiscal rules -- as well as a credit line with
the Inter-American Development Bank and other insurance mechanisms,
will allow the authorities to better respond to climate-related
shocks in the future.
WHAT COULD CHANGE THE RATING DOWN
Moody's would downgrade the rating if (1) government fiscal consolidation
efforts materially missed the targets set by the country's fiscal
rules or, if The Bahamas were affected by a climate-related
shock and the policy response did not present a credible return to the
fiscal rule's medium-term targets; (2) if the government
failed to continue strengthening the fiscal policy framework; or
(3) contingent liabilities stemming from Bank of The Bahamas --
or other SOEs -- materialize on the sovereign's balance
sheet, leading to a material worsening of government debt metrics.
WHAT COULD CHANGE THE RATING UP
Upward rating momentum would only emerge if The Bahamas experienced a
material improvement in its debt metrics and if efforts to address structural
impediments to growth led to stronger economic performance that in turn
contributed to fiscal consolidation. A continued buildup in financial
buffers to help mitigate the economic and fiscal impact of climate shocks
would also be credit positive.
GDP per capita (PPP basis, US$): 31,139 (2017
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.4% (2017 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.8%
(2017 Actual)
Gen. Gov. Financial Balance/GDP: -3.3%
(2017/18 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -16.3% (2017 Actual)
(also known as External Balance)
External debt/GDP: 19.6% (2017 Actual)
Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 15 February 2019, a rating committee was called to discuss the
rating of The Bahamas, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have increased. The issuer's
institutional strength/framework, have increased. The issuer's
fiscal or financial strength, including its debt profile,
has not materially changed. Other views raised included:
The issuer's susceptibility to event risks has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. Please see the Rating 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.
Renzo Merino
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
