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Rating Action:

Moody's downgrades The Bahamas' ratings to Ba3, maintains negative outlook

17 Sep 2021

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

No Related Data.
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