September 20, 2021
Sovereign credit ratings agency Moody’s action to downgrade The Bahamas to Ba3 from Ba2 with a negative outlook on Friday was not at all surprising, CFAL President Anthony Ferguson said yesterday, adding that he believed the action would have been made earlier had it not been for last week’s general election.
The Bahamas is now at junk bond status with the local currency ceiling having been lowered to Baa2 from Baa1 and the foreign-currency ceiling lowered to Baa3 from Baa2 as well.
Moody’s pointed to the country’s severe economic contraction from the coronavirus pandemic shock for contributing to a significant increase in this nation’s debt and interest burdens, which are now significantly higher than Ba-rated peers.
Ferguson noted “I fully expected it, we forecasted it and I believe the only reason Moody’s didn’t say earlier is because they did not want to appear to be interfering in local politics.”
Moody’s negative outlook is reflective of the ongoing risks to the country’s credit profile based on the pace of fiscal consolidation, which if tourism does not recover quickly enough, would result in higher borrowing requirements and exacerbate funding risks.
According to the ratings agency’s report. “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 percent in FY2020/21 compared with 16 percent in FY2019/20. Moody’s expects the interest-to-revenue ratio to peak in FY2021/22, but to remain above 20 percent 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.”
Moody’s forecasted that The Bahamas’ debt burden – already higher than Ba-rated peers prior to the pandemic – will remain close to 80 percent of GDP by the end of FY2022/23 (fiscal year ending June 30, 2023), well-above the Ba3-rated median 60 percent.
The agency added that the country’s narrow revenue base means its debt measured by the debt-to-revenue ratio, which stood at 509 percent at the end of FY2020/21, will also remain significantly higher than the Ba-rated median of 266 percent.
Moody’s said an upgrade is unlikely in the near future given the negative outlook, but pointed out that 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.
The agency suggested relying more on lower-cost domestic and external official sources of funding over more expensive external market issuance to improve debt affordability and possible return to a stable outlook.
That being said, Ferguson said the Davis administration must be creative in how it accomplishes critical budget spending, but tough choices can’t be avoided. “I think the first thing you have to do is really identify and assess where you are as a country from a financial perspective. We know that we borrowed net, over $4 billion in the past four years. Our debt to GDP is over 100 percent. We’ve had a muted growth and that is going to continue for at least another 12 to 18 months.”
Furthermore “ I think we need to make some tough decisions, but I think more importantly, we have to assess where we are as a country, and focus on the major priorities of the government. What are the major capital works? This is where creativity and ingenuity in terms of if specific capital works will be addressed, and some tough decisions will be made. While doing that and focusing on new opportunities, I think we have to address current opportunities, and I think the current opportunities are collecting where you are.”
“You know a lot of persons are still not paying. We have to look at addressing our current revenue slippage, On the one hand, and on the other hand, we have to look at new revenue opportunities with new industries in terms of the blue, the green, and the orange economy, and then look at assisting entrepreneurs in a constructive manner in terms of supporting them, so that we can grow the economy and we may consider reducing some factors to jump start the economy.”
Prime Minister Philip Brave Davis, who was sworn in on Friday, after winning Thursday’s general election, also said the downgrade was not a surprise to him.
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