By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Bahamas faces the prospect of a fresh credit rating downgrade within the next two months, after Moody's was stunned by data showing two consecutive years of recession.

The Wall Street rating agency announced on Friday that it was placing the Bahamas "on review" for a potential downgrade, due to both its unexpected economic contraction and further deterioration in the Government's fiscal position.

Moody's move appears to have been sparked by Prime Minister Perry Christie's affirmation of official Department of Statistics data showing that the Bahamian economy contracted by 1.7 per cent in 2015, following a 0.5 per cent shrink in 2014.

This contrasted sharply with previous positive growth estimates by both the Government, itself and the International Monetary Fund (IMF), prompting Moody's to determine that the Bahamas is "unlikely" to hit its 1.5 per cent GDP growth potential in the short-term.

Apart from its shock at the revised negative growth numbers, Moody's 'review' also appears to have been sparked by concerns that the Christie administration's consolidation plan has yet to arrest the growth in the $6.6 billion national debt and related ratios.

It pointed out that "debt accumulation" has continued to increase, with the Government's direct debt-to-GDP ratio growing by five percentage points in two years to hit 65.2 per cent at the June 30 end to the 2015-2016 fiscal year.

And Moody's also appears concerned that the Christie administration consistently fails to hit its Budget projections, and the adequacy and effectiveness of its policy responses to the Bahamas' problems.

"The decision to place the ratings on review was prompted by the continuing rise in risks to the country's medium-term economic prospects and to its fiscal strength, notwithstanding the Government's ongoing fiscal consolidation programme," Moody's said on Friday.

"The review will allow Moody's to assess the likelihood that economic growth prospects will improve, debt metrics will stabilise and government policy will effectively address its macroeconomic and fiscal challenges."

Of particular concern to the Bahamas and its economy, Moody's warned that any potential downgrade could be "by one notch or more". It currently has a 'Baa2' rating on this nation, meaning the Bahamas is two notches away from being cut to so-called 'junk' status - a position where it will lose its existing investment grade status.

Moody's announcement on Friday thus bring it more into line with its 'fellow traveller', Standard & Poor's (S&P), which presently has the Bahamas just one notch above 'junk status'. This thus raises the possibility that the Bahamas could be downgraded to 'junk' by both international credit rating agencies almost simultaneously.

The country has until August to convince Moody's otherwise, and is also in the middle of the 'six-24 month' period set by S&P to determine whether it, too, will follow through on the "greater than one-in-three chance" of a Bahamas downgrade.

Much will now depend on what happens when both Moody's and Standard & Poor's (S&P) visit the Bahamas this month to conduct their annual economic and fiscal assessments, and meet with key Government and private sector officials.

The key will be for the Christie administration to convince both rating agencies that its economic growth and fiscal policies are up to the task, and will deliver the results promised to both them and the Bahamian people.

The loss of ‘investment grade’ status would be highly damaging for the Bahamas and its economy, as it signals to the international capital markets that this nation’s creditworthiness is slipping. As a result, the Government will have to pay more for current and future debt issues, raising its debt servicing (interest) costs, and sucking money away from essential public and security services.

A downgrade to ‘junk’ could also deter investors assessing the Bahamas as a place to invest, as it raises questions about the Government’s economic management.

Moody's on Friday confirmed that the potential downgrade was in the offing between now and August, and that "the change could be by one notch or more".

"On 30 June, 2016, a rating committee was called to discuss the rating of the Bahamas Government," it added. "The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have decreased. The issuer's fiscal or financial strength, including its debt profile, has decreased."

Moody's continued: "Moody's could downgrade the rating if the review were to conclude that government policy and strategy is unlikely to lead to a stabilisation in the debt trajectory over the next two years. Evidence of further shocks to growth that would make further fiscal adjustment more difficult would also be credit negative. More generally, indications that the slowdown in growth will be even deeper and more protracted than currently expected would be negative for the rating."

The Bahamas' sovereign creditworthiness would stabilise at the current 'Baa2', Moody's added, "if the review were to conclude that the Government's policy response will support the strengthening of the Bahamas' economic and fiscal strength" such that it comes into line with similarly rated nations.

Top of Moody's 'priority list' is to determine whether the Bahamas' medium-term economic growth prospects will improve. The Government is projecting a modest GDP expansion of 0.7 per cent in the upcoming 2016-2017 fiscal year, followed by a slightly more robust 1.6 per cent in 2017-2018.

"The first driver for the review is to allow Moody's to assess the likelihood that the decline in the Bahamas' economic strength will be reversed over the medium term," the rating agency said on Friday. "According to the latest national accounts report published by the Bahamas' Department of Statistics in June 2016, the Bahamian economy grew on average by 1.2 per cent in 2010-2013, and then output contracted in both 2014 and 2015 by 1.1 per cent on average.

"This contrasts with previous assessments published in 2014 and 2015, when GDP had been estimated to have grown on a consistent basis."

After getting over its shock at two years of consecutive recession, Moody's turned to the symptoms of the Bahamas' economic malaise. "The worsened economic performance is characterised by persistently high levels of unemployment, stagnant credit to the private sector and declining investment, in part explained by the indefinite opening of the Baha Mar mega resort," it said.

"Additionally, structural constraints related to the energy sector and labour market negatively impact costs for the tourism sector, which accounts both directly and indirectly for about 50 per cent of GDP. Given that these conditions are likely to persist in 2016 and 2017, Moody's considers that it is unlikely that the Bahamas will return to its potential growth rate of about 1.5 per cent in the short-term."

Moody's pledged that its review "will assess the volatility in GDP estimates reported in recent years", implying that it will review its own projections as well as those given by the Government and Department of Statistics. It will also "examine the Government's plans to put forward growth-supporting reforms, including the upcoming National Development Plan and a mortgage relief plan, to boost economic performance past 2017".

"Moody's review will also look at the Bahamas' level of competitiveness relative to other similar economies to gauge the effect this has on its economic strength," the Friday release added.

Given that Moody's will be probing 'sensitive' areas where the Bahamas has not fared too well in recent years, a downgrade appears increasingly likely.

The rating agency, though, said the second area it will focus on is how likely the Christie administration is to "stabilise its deteriorating debt metrics and restore fiscal strength".

"The second driver of the review is to allow Moody's to assess whether the Government's debt ratios are likely to stabilise," it explained. "The Bahamas' government debt-to-GDP ratio has continued to rise since we downgraded the sovereign's ratings to Baa2 and stabilised the outlook to an estimated 65.2 per cent of GDP by the end of 2015-2016, from 60.2 per cent in 2013-2014.

"Although the Government has been able to reduce its fiscal deficit by introducing a Value-Added tax in January 2015, debt accumulation has persisted, weakening the Bahamas' fiscal strength relative to Baa-rated peers. At low (-), the Bahamas' fiscal strength is the lowest in the Baa rating category."

Moody's is thus the latest to state that VAT by itself is not a 'cure all' for the Bahamas' fiscal woes, and its statement will again raise questions as to whether the increased revenues are being applied to reduce the deficit and national debt.

"Moody's will examine the macroeconomic and fiscal conditions that would support the stabilisation of the Government's debt metrics," the rating agency said. "Moody's will also assess the Government's plans to rein in expenditures over the medium-term and what, if any, additional revenue measures may be implemented to further support the fiscal consolidation efforts."

The Christie administration has pledged to reduce recurrent 'fixed cost' spending as a percentage of GDP from a peak of 25.3 per cent in the upcoming fiscal year to 22.8 per cent by 2018-2019. However, recurrent spending for 2016-2017 is forecast to rise by $166 million year-over-year, or 7.7 per cent, increasing from $2.155 billion to $2.321 billion.

Moody's said the third, and final, strand of its review will be to assess the effectiveness of the Christie administration's policy response to its economic and fiscal challenges.

"The third driver of the review is to allow Moody's to assess the Government's policy credibility and effectiveness in response to the ongoing macroeconomic and fiscal challenges," it said. "During the review, Moody's will examine fiscal performance in recent years relative to Budget targets, and the effectiveness of fiscal measures introduced to support deficit reduction efforts.

"Moody's will also look at banking sector regulation given the persistent high level of non-performing loans, as well as the Bahamas' anti-money laundering/counter-terrorism financing framework in the context of heightened scrutiny of offshore centres and de-risking in correspondent banking."

Loretta Butler-Turner, the Free National Movement MP for Long Island, described the announced review and possible downgrade as “another disturbing sign of the catastrophic failure of leadership on the economy by the PLP, led by Perry Christie, who has proven to be a spectacular failure as Prime Minister and as Minister of Finance”.

She attributed the lack of growth in the economy, the unemployment level and “the daily suffering of scores of Bahamians” to “gross mismanagement” of the economy by the Progressive Liberal Party. “Our economic woes are not mostly because of external factors. We are in a downward spiral because of the policy blunders and incompetence of the Christie administration,” she said in a statement. “A delusional prime minister kept painting a rosy picture as the economy worsened and dark clouds settled over the country’s future. In successive budgets the PLP government projected growth.

The Democratic National Alliance reacted to the Moody’s announcement with sadness, suggesting that from all indications an actual downgrade is very possible.