By Travis Cartwright-Carroll
Nassau Guardian Staff Reporter
NASSAU, Bahamas -- International credit ratings agency Moody’s on Thursday downgraded The Bahamas’ credit rating from A3 to Baa1, the third downgrade for the country in as many years.
In addition, Moody’s said the country’s economic outlook remains negative.
“We see limited prospects for the fiscal consolidation necessary to strengthen the government’s balance sheet and stabilize debt levels,” said the Moody’s rating action.
Moody’s cited three driving factors for the decrease: Limited growth prospects and weak recovery in tourism and construction; significant and rapid deterioration of the government’s balance sheet exacerbated by a low revenue base, and high and rising levels of debt and weakening of debt sustainability relative to other countries.
In an interview with The Nassau Guardian, assistant vice-president and analyst at Moody's, Edward Al-Hussainy, said further downgrades are possible if the government does not act immediately to curb the country’s rising debt levels.
Moody’s said the country’s tourism, offshore financial services, and construction sectors remain vulnerable due to an uncertain recovery in the United States.
The rating action also pointed to the country’s limited revenue generation potential.
“The Bahamas has a limited revenue base and the government relies disproportionately on volatile trade-related tax revenue and property taxes. One-time revenue inflows, the divestment of the Bahamas Telecommunications Company and stamp duties on several large tourism projects financed by foreign investment, masked a decline in recurrent revenue in 2011, and will not be credit supportive going forward,” said Moody’s.
“We do not expect reforms necessary to increase recurrent revenues, most importantly the introduction of a value-added tax and a modernization of the property tax system, to materialize before 2014/15.”
While the ratings agency placed the lion’s share of blame for the country’s current debt level on the last Ingraham administration, it also blamed the current administration for not acting quickly enough to curb spending.
“The downgrade incorporates a marked deterioration of the government’s financial balance sheet over the past five years,” Moody’s said.
“Expenditure growth has continued following the election of a new government in May 2012, and the state plays an increasingly dominant role in the economy through elevated levels of capital spending on public works projects, social safety net transfers, public sector employment, and increased budgetary support to public sector corporations.
“This fiscal stimulus program is yet to yield growth dividends and unemployment remains close to 15 percent, depressing domestic demand.”
Moody’s said it expects the government to find it difficult to stabilize the debt and place it on a sustainable trajectory in the near-term.
“While the pace of increase in government debt ratios is likely to slow in the coming years, a failure to reverse the recent trend of rising debt will place downward pressure on The Bahamas' rating,” the agency said.
“In addition, the crystallization of contingent liabilities from debt held by public sector corporations such as the loss-making Bahamas Electricity Corporation could adversely affect the rating. A further deterioration of the public sector balance sheet due to external shocks in the form of weather-driven events like hurricanes will also be credit negative.”
The Ministry of Finance responded to the rating downgrade on Thursday night, stating that the government would lay out “clear detailed action points” to address the situation during an upcoming mid-year budget process.
“The government of The Bahamas is committed to the stabilization and gradual reversal of these negative trends and to that end has developed a medium-term strategy, the aim of which is to reduce expenditure as a percentage of GDP, and increase revenue as a percentage of GDP,” said the ministry.
“We intend to achieve this through expenditure control, improved revenue administration and economic growth.”
A downgrade from Moody's ultimately means a higher cost of borrowing, which could adversely affect the country’s economic growth.
Standard & Poor’s downgraded The Bahamas’ sovereign credit rating from BBB+ to BBB late last year.
Republished with permission of the Nassau Guardian