By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas has now failed to achieve ‘investment grade’ status with any of the three major credit rating agencies after Fitch yesterday assigned a ‘BB-’ long-term ranking to this nation.

Asserting that “additional measures” will be required from the Government to hit “the ambitious but achievable” 50 percent debt-to-GDP target ratio by 2030-2031, Fitch’s ‘BB-’ rating places The Bahamas in “speculative” territory that is below the agency’s ‘investment grade’ credit ratings of ‘BBB’ and up.

Its ‘rating definitions’ describe the ‘BB’ category as signalling that a borrower has “an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time”. However, the likes of The Bahamas still have sufficient “business or financial flexibility that supports the servicing of financial commitments”.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business that while Fitch has rated The Bahamas “one notch higher” than both Moody’s and Standard & Poor’s (S&P) it is no surprise that it has joined the latter two in placing this nation at “junk” or “speculative” status.

A non-investment grade rating means The Bahamas is perceived by the agencies, as well as investors and the capital markets, as a more risky borrower with greater prospects of defaulting on its debt than a nation that is at investment grade. This means The Bahamas will have to pay more for any borrowings which, in, translates to higher interest rate and debt servicing costs that, ultimately, have to be borne by taxpayers. 

So-called “junk” or “speculative” status can also deter investors as they can become nervous about a country’s ability to manage its finances. The Prime Minister, in unveiling the mid-year Budget at end-February, said the Government had hired Fitch to assess The Bahamas’ creditworthiness, fiscal position and economic prospects as part of a strategy to restore this nation to ‘investment grade’ status.

“This administration announces an important new objective: Securing an ‘investment grade’ credit rating for The Bahamas within the next three years,” Philip Davis KC said.

“To support this goal, we have engaged Fitch Ratings as a third credit rating agency to assess our financial standing alongside Moody’s and S&P. Achieving an ‘investment grade’ rating requires a minimum of ‘Baa3’ from Moody’s and ‘BBB-’ from both S&P and Fitch.

“Reaching this milestone would affirm The Bahamas’ strong creditworthiness and low investment risk, reinforcing our commitment to sound financial management. We intend to implement the necessary reforms to make this vision a reality.”

Mr Bowe, though, yesterday asserted that it was unrealistic to expect Fitch’s rating of The Bahamas’ creditworthiness to be substantially different from that of Moody’s or S&P. He added that the message from all three, even after Moody’s upgraded this nation’s outlook from ‘stable’ to ‘positive’, is that The Bahamas “is where it is” and there is little prospect of a “multi-notch” improvement to investment grade within the next year.

“It would be naive of any policymaker to believe the rating agencies will vary significantly,” the Fidelity chief said. “The reason would be because they are using the same information, looking at the same fundamental methods and calculations.”

He added, though, that the Prime Minister’s expectation was not that The Bahamas would receive an ‘investment grade’ rating from Fitch but that its assessment would detail “the areas to focus on” for this nation to escape ‘junk’ and ‘speculative’ territory.

“They were one notch above Moody’s and S&P but with a ‘stable’ outlook,” Mr Bowe told Tribune Business. “I think it says The Bahamas is where it is; the fact all rating agencies are consistent across the whole spectrum...

“It kind of indicates there is no extra ability in the country driving what I call multi-notch movements over the next six to 12 months. All of them kind of confirmed our fiscal affairs are stable with threats; the threat of hurricanes. They all highlighted the threat of lack of discipline in expenditure, the threat of revenue projections not being met, or the burden of not meeting fiscal projections.

“It’s less about the rating and outlook and more what the reports are saying that the Government needs to be focused on; what the administration and Opposition need to be focused on,” Mr Bowe added, “a long-term model and structure for taxation, how we have an equitable tax system that provides revenue.”

While disagreeing with the rating agencies’ over their argument that the Government’s debt maturities are too concentrated in the short-term, and instead should be longer term, he argued: “There needs to be focus on debt reduction in times of good so we have headroom in times of bad. The focus should be less on the debt’s duration and more on the ability to access the markets for capital.

“It’s a tempered and positive rating issued by Fitch. It highlights the areas we need to focus on. We should not expect significant variance between them [rating agencies].” Fitch, in placing a ‘stable’ outlook on The Bahamas, hinted none-too-subtly that the Government will need to introduce further fiscal austerity measures - new and/or increased taxes and possibly spending cuts, too - to hit its fiscal targets.

“The ratings reflect the Commonwealth of the Bahamas’s high GDP per capita and strong governance, as reflected in recent progress on structural fiscal consolidation. These strengths are offset by low potential growth, heavy reliance on tourism and the country’s exposure to climate-related shocks,” Fitch said.

“The ratings are also constrained by high interest and debt burdens relative to peers, although these are on an improving trend due to ongoing fiscal consolidation efforts. Government finances have improved markedly over the past couple of years, with the fiscal deficit declining to 1.3 percent of GDP in the fiscal year ended June 2024 from 3. percent in fiscal year 2022-2023.

“The primary surplus reached 2.9 percent in fiscal year 2023-2024, the highest level in at least 25 years. This fiscal consolidation reflects strong growth in revenue to 20.7 percent of GDP in fiscal year 2023-2024 from 16.2 percent in fiscal year 2017-2018, as a result of improved revenue administration and some new measures,” Fitch added.

“Fitch forecasts additional revenue growth, including from the new global minimum tax of around 1 percent of GDP, and further revenue mobilisation, which will improve the deficit to 0.5 percent in fiscal year 2024-2025. We expect a surplus of 1.2 percent in fiscal year 2025-2026, which is less than the 2.8 percent expected by the authorities, based on their expectation of additional revenue measures.”

Turning to the debt side, Fitch added: “Fiscal consolidation aims to decrease the still-high debt-to-GDP ratio, which was 81.5 percent of GDP in fiscal year 2023-2024, including guaranteed public sector debt (2.2 percent of GDP). Debt has declined considerably since its fiscal year 2019-2020 peak of 99 percent, but is still well above the ‘BB’ median of 53.3 percent and the pre-COVID ratio of 65 percent.

“Fitch expects it to fall to 77.7 percent by fiscal year 2025-2026. The 50 percent of GDP target by fiscal year 2030-2031 is ambitious but achievable with additional measures. Most government debt (57 percent) is in the domestic market and is generally of shorter duration, exposing the Government to rollover risk, although, it does have non-concessional financing from multilateral and bilateral partners and may tap the external market this year. Interest-to-revenue is high at around 20 percent, although we expect it to decline.”

Pointing to The Bahamas’ high vulnerability to external shocks, either hurricane and climate-related threats or global recessions, Fitch said: “As a small, tourism-dependent economy, The Bahamas is exposed to external shocks, most notably its dependence on imported goods, its exposure to the US economic cycle and its presence within the hurricane belt.

“The Government has instituted some mitigants to these risks, including the deployment of insurance and contingency funds to address the impacts of a large hurricane. Even so, a severe shock could have serious implications for the economy and the Government’s finances.”