New York, June 25, 2020 -- Moody's Investors Service, ("Moody's") has
today downgraded the Government of The Bahamas' long-term
issuer and senior unsecured ratings by two notches to Ba2 from Baa3.
Moody's also changed the outlook to negative. This concludes
the review for downgrade that commenced on 9 April 2020.
The key drivers behind the rating action were:
1. The large shock caused by the coronavirus crisis will weigh
significantly on economic and fiscal strength over the medium term;
2. Funding conditions will become more constrained for the government
because of larger financing needs.
The negative outlook reflects Moody's expectation that given the
severity of the coronavirus shock, the government's credit
profile will continue to be exposed to downside risks related to the recovery
of the tourism sector. This could weigh on a consolidation process
that Moody's currently expects will begin in earnest in fiscal 2021/22.
Additionally, given its higher borrowing requirements for fiscal
2020/21, the government could face more pronounced liquidity challenges
than currently expected.
Moody's has today also lowered The Bahamas' long-term foreign-currency
bond ceiling to Baa3 from Baa1 and long-term foreign-currency
deposit ceiling to Ba3 from Baa3. The short-term foreign-currency
bond ceiling was lowered to Prime-3 from Prime-2,
whereas the short-term foreign-currency deposit ceiling
was lowered to Not Prime from Prime-3. The Bahamas' long-term
local currency country risk ceilings were lowered to A3 from A2.
The long-term foreign-currency bond ceilings for Bahamas
- Off Shore Banking Center was lowered to A2 from Aa3, while
the long-term foreign-currency deposit ceiling remains at
A2. The short-term foreign-currency bond and deposit
ceilings for the Off Shore Banking Center are unchanged at Prime-1.
RATIONALE FOR THE DOWNGRADE TO Ba2
THE LARGE SHOCK CAUSED BY THE CORONAVIRUS CRISIS WILL WEIGH SIGNIFICANTLY
ON ECONOMIC AND FISCAL STRENGTH OVER THE MEDIUM TERM
The main driver for the downgrade is the significant negative effect the
coronavirus outbreak will have on The Bahamas' economic and fiscal
metrics. For The Bahamas, the shock mainly transmits through
the sharp decline and potentially prolonged slump in the tourism industry,
which represents a sizable proportion of gross value added in the economy
as well as a source of government revenue and export earnings.
Moody's regards the coronavirus outbreak to be a social risk under
its ESG framework.
Tourism's direct contribution to Bahamian GDP is close to 20%
of the total, while its indirect contribution through other sectors
represents another estimated 20% of GDP. As a consequence
of the outbreak, the country closed its borders in late March,
which essentially halted the flow of tourists through the second quarter
of 2020. The government imposed additional restrictions on movements
on the local population to control the spread of the disease, which
will also have a negative impact on overall economic activity.
Over the past few weeks, the government has gradually lifted some
of those restrictions, and the tourism sector is slated to reopen
on July 1. However, some hotels will only restart their operations
in the fourth quarter of 2020, likely weighing on tourism flows
during the rest of the year. Uncertainty about the resumption of
the cruise sector also weighs on the short-term outlook for the
tourism sector. Given these dynamics, Moody's expects
a loss of over 50% of tourism flows in 2020 relative to 2019,
which would lead to a GDP contraction of about 16% to 20%.
Moody's believes that the recovery of the global tourism sector
is exposed to potential changes to consumer behavior following the coronavirus
outbreak. The performance of the sector will also depend on the
speed of the recovery of the airlines industry and ability to service
tourist destinations such as The Bahamas. That said, a recovery
in 2021 to 60% to 70% of 2019 tourism flows could lead to
a GDP expansion of over 10% in The Bahamas. Notwithstanding
this expected increase, The Bahamas' medium-term economic
performance will likely remain subdued because of pre-existing
structural constraints -- such as weak credit growth, high
energy costs and weak ease of doing business -- which hinder the
sovereign's economic strength.
The large GDP contraction in 2020 will weigh on the fiscal accounts through
the fiscal year that ends in June 2021. In the 2020/21 budget that
was presented in May, the government estimated a fiscal deficit
that would exceed 11% of GDP -- the highest in its history.
The large fiscal shortfall reflects a significant loss in revenue,
increased capital expenditures to support the economic recovery and reconstruction
efforts following the damage caused by Hurricane Dorian in September 2019.
Under Moody's baseline scenario, The Bahamas' debt burden
will reach 85% of GDP by June 2021, from 60% in June
2019. Additionally, the government's debt affordability
will deteriorate as a consequence of higher interest payments and the
loss of revenue, which will push the interest-to-revenue
ratio to 22.6% in 2020/21 from 13.5% in 2018/19,
although Moody's expects the ratio to decline somewhat in subsequent
years as government revenue recovers. Overall, The Bahamas'
fiscal strength will materially weaken relative to its prior Baa-rated
Despite significant improvements in fiscal policy credibility and effectiveness
-- as denoted by the strengthening of the fiscal policy framework
and significant consolidation achieved between 2016/17 and 2018/19 --
The Bahamas' credit profile will now be more vulnerable to climate-related
events given its weaker balance sheet. The government has sought
to renew some of the instruments that helped to mitigate the short-term
financial impact caused by Hurricane Dorian. However, its
more limited fiscal space could translate into heightened government and
external liquidity pressures should market access become more constrained.
FUNDING CONDITIONS WILL BECOME MORE CONSTRAINED FOR THE GOVERNMENT BECAUSE
OF LARGER FINANCING NEEDS
Following the intensification of the coronavirus crisis in March 2020,
The Bahamas' sovereign bond spreads widened significantly.
The yield on its 2028 global bond reached 11.6% in May but
has since stabilized around 8.2%. Even at this lower
level, The Bahamas' bond yields are still higher than historical
levels of around 6%. This points to more constrained market
access and, should these bond spreads remain at these levels,
it would increase government liquidity risks and place additional pressure
on debt affordability metrics.
Moody's forecasts government borrowing needs will exceed 17%
of GDP in 2020/21, above historical levels of about 7% of
GDP. About 5% of GDP corresponds to principal repayments,
most of which are due to reliable domestic sources. Moreover,
because of the loss in tourism flows, The Bahamas' external
accounts will deteriorate in 2020 and lead to a reduction in its foreign
exchange reserves. Consequently, the government plans to
finance a large share of its borrowing needs -- over 11% of
GDP -- via external sources.
Moody's expects the government will be able to fund part of its
financing requirements through official creditors, including multilateral
institutions. However, the authorities have stated that an
important portion of the funding needs will have to be financed through
external bond issuances, which will likely prove more expensive
than historically and add pressure to debt affordability metrics.
RATIONALE FOR THE NEGATIVE OUTLOOK
Given the severity of the crisis, downside risks to the credit profile
will remain over the next two years. There is still significant
uncertainty about the strength and speed of the recovery of the global
tourism sector. If in particular the recovery in 2021 is weaker
than Moody's expects, this would put additional pressure on
government revenue and further erode the government's fiscal strength.
Moody's also considers that prospects for debt stabilization are
highly susceptible to economic performance in 2021 and 2022.
There is also a risk that market sentiment towards The Bahamas does not
improve enough to enable the government to finance its larger funding
needs through 2021/22. While the favorable maturity profile mitigates
some risks related to government liquidity (the next global bond is not
due until 2024), limited market access could create external liquidity
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Environmental risks are a key concern for The Bahamas because it is located
in the so-called Hurricane Belt (as reflected by the occurrence
of Hurricane Dorian in September 2019). 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.
Social risks are material for The Bahamas. Moody's regards
the coronavirus outbreak to be a social risk under its ESG framework,
given the substantial implications for public health and safety.
Additionally, while unemployment rates have remained high over the
past decade, in particular for the younger segment of the labor
force, labor market conditions had improved in recent years.
The coronavirus crisis is likely to weigh significantly on employment
levels in the short term. This will increase pressure on government
finances, which will also be stretched out in response to the coronavirus
Governance risks are not a source of constraint to The Bahamas' credit
profile. The country showcases a stable political environment,
underpinned by a general consensus around key policy issues. The
government's small size may limit policy implementation, which Moody's
has taken into consideration in the country's institutions and governance
strength assessment. Moreover, improvements in the fiscal
policy framework in recent years have improved the government's
credibility in responding to shocks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative outlook, a rating upgrade is unlikely.
The outlook could be changed to stable if the government were to successfully
finance its larger borrowing requirements for fiscal 2020/21 and a recovery
in the tourism supports growth and budgetary revenues. Additionally,
the implementation of fiscal and economic policies that support a fiscal
consolidation process and the stabilization of the debt trend over the
coming years would be credit positive.
Negative rating pressure would emerge should the government face heightened
liquidity pressures that limited its ability to fund its larger fiscal
deficits in 2020/21 and 2021/22 and caused a more material decline in
foreign exchange reserves. Finally, if prospects for debt
trend stabilization beyond 2020/21 were to weaken, due to poor economic
growth or limited fiscal consolidation, additional credit-negative
pressures would emerge.
GDP per capita (PPP basis, US$): 33,333 (2019
Estimate) (also known as Per Capita Income)
Real GDP growth (% change): 0.6% (2019 Estimate)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.3%
Gen. Gov. Financial Balance/GDP: -1.7%
(2019 Estimate) (also known as Fiscal Balance)
Current Account Balance/GDP: 1.2% (2019 Estimate)
(also known as External Balance)
External debt/GDP: 24.4% (2019 Estimate)
Economic resiliency: baa3
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 22 June 2020, 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. The issuer has become more susceptible
to event risks.
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.
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.
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Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
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