By NATARIO McKENZIE

Tribune Business Reporter

nmckenzie@tribunemedia.net

MOODY’s said yesterday strengthening in The Bahamas’ tourism sector and continued foreign direct investment projects will help sustain growth in the range of 1.5 to two percent over 2018-2019.

Despite this, the credit ratings agency - in its updated credit opinion on this nation yesterday - maintained the country’s Baa3 credit rating with a negative outlook.

This outlook, it said, “reflects potential downside risks to the fiscal consolidation process posed by weaker-than-expected growth, exposure to climate-related shocks in the form of hurricanes, and implementation risks associated with measures to rein in expenditure growth and increase revenue intake”.

Moody’s’ warned that absent successful fiscal consolidation, The Bahamas’ fiscal and credit profile would likely weaken.

“In addition, the sovereign is exposed to contingent liabilities stemming from state-owned enterprises (SOEs) and the Bank of the Bahamas, which, should they materialise on the government’s balance sheet, would lead to a further deterioration in the government’s fiscal strength,” said Moody’s.

It warned it would downgrade the rating if ,over the next 12-18 months, it observes that government’s fiscal consolidation efforts are “unlikely to reduce deficits to levels that would reverse the trend of rising debt ratios and lead to a stabilisation in government debt metrics.”

“Downward rating pressure would also emerge if economic growth were to underperform relative to government expectations, negatively impacting revenue and overall fiscal metrics. We would also consider a downgrade if contingent liabilities stemming from Bank of the Bahamas – or other SOEs – materialise on the sovereign’s balance sheet, leading to a material worsening of government debt metrics.

“Factors that could lead to an upgrade We would change the negative outlook to stable if the government’s efforts to reduce the fiscal deficit lead to the reversal of the debt trend such that The Bahamas’ fiscal strength and policy effectiveness would be consistent with a Baa3 rating. Evidence that measures implemented to rein in expenditures and enhance fiscal policy controls would remain in place over the coming years, ensuring greater fiscal discipline and providing the government with more fiscal space to face shocks, would also support the stabilisation of the outlook,” the ratings agency said.

In response to Moody’s announcement Finance Minister K. Peter Turnquest said: “The ratings agency Moody’s Investors Service in its latest rating assessment of The Bahamas, maintained its Baa3 negative rating, which is unchanged from its previous report. I am pleased to report to the country that this independent assessment reflects stabilization in our sovereign credit profile following four years of successive rating downgrades. This represents a critical first step in addressing and reversing years of fiscal mismanagement.

“As outlined in the recent budget exercise, the Government’s combination of economic initiatives, including: the introduction of focused fiscal measures; the imminent introduction of fiscal responsibility legislation; moves to stimulate domestic economic growth through support for Bahamian entrepreneurs and small businesses; and the substantial pipeline of major investment within the country will lead to strong and sustained economic growth and a stable macro-economic trajectory for the country.

“The Government of The Bahamas remains committed to executing its economic agenda to stimulate growth, contain expenditure and restore fiscal health to public finances.”

Moody’s noted that increases in Value Added Tax (VAT), gaming houses taxes and other levies will have to compensate for the likely reduction in custom duties after the current fiscal year as The Bahamas moves closer to WTO accession by December 2019.

Commenting on the impending fiscal responsibility legislation and fiscal rules expected to be tabled in the fall, Moody’s said government will need to prepare and implement adjustment plans should deviations from the rules happen.

“We consider that establishing these rules in law will be an important step towards strengthening the institutional arrangements that guide fiscal policy in The Bahamas. Moreover, equally important will be the government establishing a track record in terms of the reporting requirements set by the legislation, therefore enhancing transparency, and meeting the targets set in the rule,” said Moody’s.

“The economy expanded 1.4 percent in real terms last year – above our expectation of 0.5 percent. Reconstruction efforts following the damage caused by Hurricane Matthew in late 2016 led to a strong contribution to growth by gross fixed capital formation.

“Household and public consumption also contributed to growth, while the large import component of additional domestic demand acted as a drag on the overall GDP expansion.

“We expect that the strengthening tourism sector – in part driven by the now full operations of the Baha Mar resort – and continued FDI-related projects will contribute to sustain growth in the 1.5 percent - 2 percent range in 2018-19,” Moody’s said.