By Neil Hartnell 

Tribune Business Editor 

nhartnell@tribunemedia.net 

The scale of the economic and fiscal challenges facing the new Philip Davis-led administration were laid bare Friday, after Moody’s further downgraded the Bahamas’ sovereign creditworthiness. 

The credit rating agency, in slashing the country’s long-term issuer and senior unsecured ratings to ‘Ba3’ from ‘Ba2’, warned that the devastation inflicted by COVID-19 and Hurricane Dorian will have “lasting consequences” for the Bahamian economy with stopover arrivals only returning to pre-pandemic numbers in 2024. 

This latest action plunges The Bahamas further into non-investment grade or ‘junk’ status, with Moody’s adding that the country’s $10.356bn national debt is now more than six times’ bigger than the Government’s annual income or revenue base. 

The consequences of the latest downgrade include a further potential increase in the Government’s borrowing costs when it goes out to raise hundreds of millions of dollars in more debt financing later this year. 

Investors will likely seek higher interest rates on Bahamian sovereign debt to compensate for the extra risk due to the Government’s loss of creditworthiness. This, in turn, will lead to higher debt servicing costs that will ultimately have to be paid by the Bahamian taxpayer. 

The timing of Moody’s actions is especially bad given that the Government’s 2021-2022 borrowing plan projected it would seek to place a $700m bond with the international capital markets in late September/early October, depending on prevailing conditions.  

Those conditions have suddenly become much more negative and could force that issue – which was the largest chunk of the Government’s multi-billion borrowing plan – to be delayed or not proceed at all given that lenders may likely demand much greater interest rates – as high as 8-9 percent. 

And the downgrade could also hit foreign direct investment (FDI) and associated confidence, as investors will have to factor increased country and fiscal risks into their decisions as to whether to deploy capital on projects in this nation. 

The Government appeared to be unaware of the downgrade until contacted by The Tribune this evening. The new Prime Minister’s spokesperson said: “Oh wow, oh wow” when informed, and then added that they were heading off to inform him and seek more information before the call ended. 

Many observers are likely to be suspicious about the timing of Moody’s downgrade, coming just one day after the general election and within hours of Mr Davis’ swearing-in as prime minister. 

Former Prime Minister Dr Hubert Minnis said during the campaign that his reasons for calling an early election would become obvious soon after. It is unclear whether he was referring to Moody’s impending downgrade, with the rating agency traditionally publishing its annual report on The Bahamas in August. 

It broke with that tradition this year, but there is no confirmation that the outgoing government asked Moody’s to delay taking action for fear it would have influenced voters on election day. The rating agency called a meeting to discuss its impending Bahamas’ downgrade on September 14, just two days before the general election. 

Moody’s, in maintaining a “negative outlook” on The Bahamas, justified the downgrade by saying: “The downgrade to ‘Ba3’ reflects the significant erosion of The Bahamas' economic and fiscal strength brought on by the coronavirus pandemic.  

“Moody's expects the gradual recovery in tourism to leave a long-lasting impact on The Bahamas' credit profile through materially higher debt and interest burdens, which will significantly exceed those of ‘Ba3’-rated peers.” 

The rating agency only cut The Bahamas’ sovereign creditworthiness, which measures the Government’s ability to pay its debts and bills, by one notch this time having slashed it by two spots in June 2020. 

“The duration and severity of the coronavirus shock has fundamentally weakened The Bahamas' credit profile with lasting consequences in terms of a higher debt burden and weaker debt affordability, as well as reduced economic strength,” Moody’s said. 

“Real GDP contracted by 14.5 percent in 2020, with the tourism industry most severely affected by a shutdown that lasted for most of the year. Despite the uptick in tourism activity in recent months, The Bahamas faces prospects of a slow economic recovery, and one that remains vulnerable to potential future variants of the coronavirus. Moody's expects stayover tourist arrivals to return to 2019 levels only by 2024 at the earliest.” 

With The Bahamas’ debt and interest repayment burdens higher than other countries rated ‘Ba’ by Moody’s, the rating agency added that the $10.356bn national debt was six times’ higher than the Government’s COVID-reduced revenues at end-June 2021. 

“The Bahamas' debt burden was already higher than ‘Ba’-rated peers prior to the pandemic, and will remain above similarly rated peers as the economy recovers only slowly from the pandemic,” Moody’s said. “Fiscal consolidation driven by the removal of COVID-related spending on unemployment benefits and other related items, along with a revenue recovery, will support fiscal consolidation, which will reduce the debt burden gradually.  

“The Bahamas' debt burden will remain close to 80 percent of GDP by the end of fiscal year 2022-2023 well above the ‘Ba3’-rated median (60 percent). Moreover, The Bahamas' narrow revenue base means its debt measured by the debt-to-revenue ratio, which stood at 509 percent at the end of fiscal year 2020-2021, will also remain significantly higher than the Ba-rated median of 266 percent. 

“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 fiscal year 2020-2021 compared with 16 percent in fiscal year 2019-2020. Moody's expects the interest-to-revenue ratio to peak in fiscal year 2021-2022, but to remain above 20 percent over the subsequent three years, and significantly higher than rated peers.” 

On the positive side, Moody’s said the Government’s debt had a “favourable structure thanks to a captive domestic investor base” while its external debt has “a long maturity profile” due to principal repayments being spread out between issues and over many years. 

“The Bahamas' relatively strong institutional framework, stable political system and a fiscal policy framework that is more responsive to economic shocks have supported the credit profile,” the rating agency added.  

“The Bahamas also stands out among similarly-rated peers because of its comparatively high level of GDP per capita, which supports its debt-carrying capacity.” 

However, Moody’s added that the downgrade was initiated because The Bahamas’ economic strength had “materially decreased” while its debt burden had skyrocketed, thus leaving the country extremely vulnerable to future hurricanes, pandemics and recessions. 

“The negative outlook reflects the ongoing risks to the credit profile related to the pace of fiscal consolidation, which will be determined largely by how quickly tourism activity recovers,” Moody’s added. “A slower pace of fiscal consolidation would result in higher borrowing requirements and exacerbate funding risks. 

“The reliance on indirect taxation -- VAT and excise taxes -- makes government tax collection more sensitive to the speed of the economic recovery. A slower recovery would place downward pressure on revenue and limit the speed of fiscal consolidation, and prospects for debt stabilisation. Larger-than-expected fiscal deficits in turn would increase reliance on external market borrowing and could create external liquidity pressure.” 

Moody’s suggested that an improvement in The Bahamas’ sovereign credit rating was unlikely in the near term. It added: “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.  

“An improvement in debt affordability, which includes relying more on lower-cost domestic and external official sources of funding over more expensive external market issuance, could also support a return to a stable outlook. 

“A slower pace of fiscal consolidation that contributes to tightening financing conditions, and a rise in borrowing costs, which would challenge the Government's ability to finance fiscal deficits and maturing debt would likely lead to a further downgrade.”