Moody’s Investors Service, (Moody’s) has downgraded the Bahamas government long-term issuer and senior unsecured ratings by two notches to Ba2 from Baa3.
The US-based rating agency also changed the outlook to negative following a review that commenced on April 2.
In a statement, Moody’s said the key drivers behind the rating action were the large shock caused by the coronavirus (COVID-19) crisis will weigh significantly on economic and fiscal strength over the medium term as well as the funding conditions will become more constrained for the government because of larger financing needs.
“Uncertainty about the resumption of the cruise sector also weighs on the short-term outlook for the tourism sector.”– Moody’s
“The negative outlook reflects Moody’s expectation that given the severity of the coronavirus shock, the government’s credit profile will continue to be exposed to downside risks related to the recovery of the tourism sector.
“This could weigh on a consolidation process that Moody’s currently expects will begin in earnest in fiscal 2021/22. Additionally, given its higher borrowing requirements for fiscal 2020/21, the government could face more pronounced liquidity challenges than currently expected,” Moody’s said in a statement.
Moody’s said the short-term foreign-currency bond ceiling was lowered to Prime-3 from Prime-2, whereas the short-term foreign-currency deposit ceiling was lowered to Not Prime from Prime-3. The Bahamas’ long-term local currency country risk ceilings were lowered to A3 from A2.
“The long-term foreign-currency bond ceilings for Bahamas – Off Shore Banking Center was lowered to A2 from Aa3, while the long-term foreign-currency deposit ceiling remains at A2. The short-term foreign-currency bond and deposit ceilings for the Off Shore Banking Center are unchanged at Prime-1.”
“The main driver for the downgrade is the significant negative effect the coronavirus outbreak will have on The Bahamas’ economic and fiscal metrics. For The Bahamas, the shock mainly transmits through the sharp decline and potentially prolonged slump in the tourism industry, which represents a sizable proportion of gross value added in the economy as well as a source of government revenue and export earnings. Moody’s regards the coronavirus outbreak to be a social risk under its ESG framework.”
It said tourism’s direct contribution to Bahamian gross domestic product (GDP) is close to 20 per cent of the total, while its indirect contribution through other sectors represents another estimated 20 per cent of GDP.
“As a consequence of the outbreak, the country closed its borders in late March, which essentially halted the flow of tourists through the second quarter of 2020. The government imposed additional restrictions on movements on the local population to control the spread of the disease, which will also have a negative impact on overall economic activity.
“The main driver for the downgrade is the significant negative effect the coronavirus outbreak will have on The Bahamas’ economic and fiscal metrics.”– Moody’s
“Over the past few weeks, the government has gradually lifted some of those restrictions, and the tourism sector is slated to reopen on July 1. However, some hotels will only restart their operations in the fourth quarter of 2020, likely weighing on tourism flows during the rest of the year. Uncertainty about the resumption of the cruise sector also weighs on the short-term outlook for the tourism sector. Given these dynamics, Moody’s said it expects a loss of over 50 per cent of tourism flows in 2020 relative to 2019, which would lead to a GDP contraction of about 16 to 20 per cent.
Further, Moody’s said the large GDP contraction in 2020 will weigh on the fiscal accounts through the fiscal year that ends in June 2021.
“In the 2020/21 budget that was presented in May, the government estimated a fiscal deficit that would exceed 11 per cent of GDP — the highest in its history. The large fiscal shortfall reflects a significant loss in revenue, increased capital expenditures to support the economic recovery and reconstruction efforts following the damage caused by Hurricane Dorian in September 2019.”
Under Moody’s baseline scenario, The Bahamas’ debt burden will reach 85 per cent.