S&P gives Bahamas major post-Dorian lift

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Standard & Poor’s (S&P) has given The Bahamas a much-needed post-Dorian boost by asserting that this nation is “well-positioned to handle the fall-out” from the category five storm.

The international credit rating agency, in a preliminary assessment that suggested no further downgrade to The Bahamas’ sovereign credit rating is imminent, added that the hurricane’s long-term impact “could be limited” despite it devastating islands that account for between 15-20 percent of gross domestic product (GDP).

Echoing sentiments expressed by K Peter Turnquest, deputy prime minister, last week, S&P said the extent of Dorian’s blow for both the economy and Bahamian sovereign creditworthiness will ultimately depend on how well the government “responds in a timely manner” to all the challenges created by this natural disaster.

It also agreed with the Central Bank’s forecast that Dorian may not have wiped out all projected Bahamian GDP growth for 2019, given that only two islands were severely impacted and much of the winter tourism season’s gains were already locked in.

S&P said the timing of Dorian’s arrival, right at the start of the traditional trough or “valley” in Bahamian tourism, was another factor that may prevent the storm causing “a meaningful deterioration in The Bahamas’ economy, fiscal performance and debt burden”.

While that is likely to be just what Mr Turnquest and the Ministry of Finance want to hear, S&P joined fellow rating agency, Moody’s, in noting that The Bahamas’ high exposure to natural disasters and global warming has likely contributed to this nation’s below par economic growth over the past decade.

S&P, in its October 3 “bulletin”, said it continued to examine Dorian’s short and medium-term impact on its rating of The Bahamas, which currently stands at (BB+/Stable/B). This is one notch below so-called “investment grade”, reflecting the so-called “junk” downgrade this nation suffered at S&P’s hands just before Christmas 2016.

However, there was no mention of any further potential downgrade in the immediate term, although S&P warned that such a move might occur if the Government’s financial position deteriorated below the agency’s medium-term expectations.

“We will continue to follow the developments and pace of recovery efforts, including the Government’s ability to respond effectively to the many challenges of recovery,” S&P confirmed.

“We will focus particularly on the implications for long-term economic growth, government finances, debt burden and the country’s external position. We could lower the rating if we come to expect that public finances deteriorate compared with medium-term expectations, either because of the fiscal impact of the hurricane or weakened political commitment to fiscal sustainability.”

Still, S&P struck a noticeably upbeat tone on the Government’s ability to manage the fiscal and economic fall-out from Dorian such that this nation’s prospects will not be derailed long-term. It suggested that “early signs” were promising.

“Preliminary information available to us suggests that the long-term effects of the hurricane on credit quality could be limited, provided that the Government is able to respond in a timely manner to the various challenges posed by the natural disaster,” S&P analysts asserted.

“The hurricane severely damaged Abaco and, to a lesser extent, Grand Bahama. While the damage has been confined to those two islands, they represent about 15 percent to 20 percent of Bahamian GDP. Despite the significant damage to Abaco and Grand Bahama, several factors suggest that the long-term effects of the hurricane on The Bahamas’ credit quality could be limited.”

Explaining its rationale, S&P said: “The hurricane struck outside of peak tourist season, and the physical damage was concentrated on two islands that together attract only about 20 percent of tourists. Other destinations within the country, including Nassau, the capital and economic centre, were unaffected.

“Furthermore, before the hurricane, the country had been on track to achieve good GDP growth in 2019, slightly exceeding our forecast. The Government also recently reported a relatively strong fiscal performance in 2019 (year ended June 30).

“Based on the information currently available, the timing and location of the hurricane’s impact, and the country’s relatively strong economic and fiscal performance year-to-date, it is possible that Dorian may not lead to a meaningful deterioration in The Bahamas’ economy, fiscal performance, debt burden and external assessment.”

The economic analysis matches that by the Central Bank of The Bahamas, which last week predicted that the economy will “resume healthy economic growth” in 2021 following a potential Dorian-induced contraction next year as rebuilding gathers pace.

And - in-line with S&P - it suggested that this nation’s gross domestic product (GDP) would still expand in 2019, albeit at a much lower pace than the projected 1.8 percent, as winter season tourism gains had already been locked-in prior to the category five storm’s arrival.

However, S&P argued that Bahamian economic growth and fiscal discipline have become extremely vulnerable to weather-related disasters such as Dorian. “This event highlights the importance of considering environmental factors in our analysis of The Bahamas, given its location in the Atlantic hurricane belt, and the large geographic dispersion of its 700 islands over almost 14,000 square kilometers,” the rating agency added.

‘In the past five years, The Bahamas has been affected by at least four other serious hurricanes. We believe this elevated environmental risk has contributed to below-average growth for The Bahamas, when compared with peers with similar GDP per capita.

“The Bahamas has taken steps to mitigate the risks related to increasingly frequent climate disasters by strengthening its public finances, planning for these events, and obtaining insurance. Despite these efforts, vulnerability to natural disasters continues to affect the country’s creditworthiness.”

S&P’s analysis comes less than a week after Mr Turnquest said The Bahamas’ ability to attract high-quality investment and manage restoration costs following Dorian will be critical to avoiding a sovereign credit rating downgrade.

While conceding that the Government was “obviously concerned” about such an outcome, he said both S&P and Moody’s had so far shown “understanding” about The Bahamas’ plight. The former rating agency’s assessment confirms his analysis was correct.

The tone, and content, in the assessments from both credit rating agencies indicate they are giving The Bahamas a break and breathing room in which to find itself and deal with the challenges posed by Dorian.