New York, September 17, 2021 -- Moody's Investors Service ("Moody's") has today
downgraded the Government of The Bahamas' long-term issuer and
senior unsecured ratings to Ba3 from Ba2 and maintained the negative outlook.
The downgrade to Ba3 reflects the significant erosion of The Bahamas'
economic and fiscal strength brought on by the coronavirus pandemic.
Moody's expects the gradual recovery in tourism to leave a long-lasting
impact on The Bahamas's credit profile through materially higher
debt and interest burdens, which will significantly exceed those
of Ba3-rated peers.
The Bahamas' credit profile continues to be supported by a relatively
strong institutional framework and a stable political environment.
The Bahamas also benefits from its comparatively high level of GDP per
capita, which supports its debt-carrying capacity.
The negative outlook reflects the ongoing risks to the credit profile
related to the pace of fiscal consolidation, which will be determined
largely by how quickly tourism activity recovers. A slower pace
of fiscal consolidation would result in higher borrowing requirements
and exacerbate funding risks.
The Bahamas' local currency ceiling was lowered to Baa2 from Baa1.
The four-notch gap to the local currency rating reflects an established
track record of predictable and reliable macroeconomic policymaking balanced
against a reliance on tourism that represents a common risk for the government
and non-government issuers in the country.
The Bahamas' foreign-currency ceiling was lowered to Baa3
from Baa2. The one-notch gap between the local and foreign-currency
ceilings reflects low transfer and convertibility risk, itself anchored
by a history of relatively strong economic institutions supporting exchange
rate stability and limited external indebtedness, despite a history
of capital controls.
RATINGS RATIONALE
RATIONALE FOR DOWNGRADE TO Ba3
EROSION OF ECONOMIC AND FISCAL STRENGTH AS A RESULT OF THE CORONAVIRUS
PANDEMIC
The duration and severity of the coronavirus shock has 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.
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.
The economic recovery is highly dependent on a rebound in tourism activity.
Tourism's direct contribution to GDP was around 19% of GDP in 2019
and, when including the indirect contribution from other industries
such as transport and accommodation and food service, 40%
of GDP on average between 2015 and 2019.
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 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.
Despite the government's recent debt increases, its debt has a favorable
structure thanks to a captive domestic investor base and a long maturity
profile, particularly for its external market debt. Meanwhile,
The Bahamas' relatively strong institutional framework, stable political
system and a fiscal policy framework that is more responsive to economic
shocks have supported the credit profile. The Bahamas also stands
out among similarly rated peers because of its comparatively high level
of GDP per capita, which supports its debt-carrying capacity.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects the material risks to the pace of the economic
recovery, which would slow the pace of fiscal consolidation and
increase funding risk.
The pace of the economic recovery, and particularly tourism activity,
will directly affect the pace of fiscal consolidation and how quickly
debt begins to decline. The reliance on indirect taxation --
VAT and excise taxes -- makes government tax collection more sensitive
to the speed of the economic recovery. A slower recovery would
place downward pressure on revenue and limit the speed of fiscal consolidation
and prospects for debt stabilization. Larger-than-expected
fiscal deficits in turn would increase reliance on external market borrowing
and could create external liquidity pressure.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
The Bahamas' ESG Credit Impact Score is moderately negative (CIS-3)
reflecting its exposure to environmental risks, moderately negative
social risks and a strong institutional framework that supports its governance.
The Bahamas' exposure to environmental risks is moderately negative
(E-3 issuer profile score). The Bahamas is in the so-called
Hurricane Belt and has been affected by more frequent and stronger tropical
storms in recent years. Because tourism represents a large share
of the economy, disruptions to the sector caused by weather events
can affect the credit profile. In addition, The Bahamas is
exposed to rising sea levels, with 72% of its land being
low lying or within five meters above sea level.
Exposure to social risks is moderately negative (S-3 issuer profile
score). Despite having a high per capita GDP on a purchasing power
parity basis, high unemployment levels for the younger segment of
the labor force can weigh on the economy.
The influence of governance on The Bahamas' credit profile is neutral-to-low
(G-2 issuer profile). Aspects of governance strength,
including a relatively strong institutional framework, help mitigate
some of the E and S risks to which The Bahamas is exposed.
GDP per capita (PPP basis, US$): 33,148 (2020
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -14.5% (2020
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.2%
(2020 Actual)
Gen. Gov. Financial Balance/GDP: -6.8%
(2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -20.8% (2020 Actual)
(also known as External Balance)
External debt/GDP: 34.3% (2020 Actual)
Economic resiliency: ba1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 14 September 2021, 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 materially decreased.
The issuer's fiscal or financial strength, including its debt profile,
has materially decreased. Other views raised included: The
issuer has become increasingly susceptible to event risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative outlook, an upgrade is unlikely in the near future.
The implementation of fiscal and economic policies that support a fiscal
consolidation process that places government debt on a more durable downward
trajectory would likely result in a return to a stable outlook.
An improvement in debt affordability, which includes relying more
on lower-cost domestic and external official sources of funding
over more expensive external market issuance, could also support
a return to a stable outlook.
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 principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, 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 further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, 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 issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
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.
David Rogovic
Vice President - Senior 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
Alejandro Olivo
MD-Sovereign/Sub Sovereign
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
