Long-Term Ratings On The Commonwealth of the Bahamas Lowered To ‘BBB+’; Outlook Stable

The Bahamas’ fiscal position has deteriorated, as the government has increased spending while its narrow revenue base has declined amid economic recession.
This has led to a rise in general government debt, and medium-term growth prospects are subdued because of the dependence on U.S. tourism.
As a result, we have lowered the sovereign credit ratings on The Bahamas to ‘BBB+/A-2’ from ‘A-/A-2’.
The stable outlook reflects a gradual tightening of the government’s fiscal stance and generally stable external financing profile.

NEW YORK Dec. 23, 2009–Standard & Poor’s Ratings Services said today that it lowered its long-term sovereign credit ratings on The Commonwealth of The Bahamas to ‘BBB+’ from ‘A–’. The short-term credit ratings are unchanged at ‘A-2’. At the same time, Standard & Poor’s lowered the transfer and convertibility assessment on The Bahamas to ‘A-‘ from ‘A’. The outlook is stable.

“The downgrade reflects The Bahamas’ weakened fiscal profile,” said Standard & Poor’s credit analyst Lisa Schineller. “Its debt and deficits have increased, and the composition of its debt has weakened somewhat. In addition, following three years of economic contraction, The Bahamas’ growth prospects beginning in 2011 are modest.”

The increased pressure on The Bahamas’ fiscal profile stems from the combination of higher levels of debt amid a stagnant growth outlook. The higher debt levels reflect the government’s financing its rising fiscal deficits, a result of countercyclical fiscal spending against a drop in The Bahamas’ already narrow revenue base. Specifically, the government has increased capital and social spending to mitigate the social impact of recession. At the same time, revenues fell by 9.2% in fiscal-year 2008/9 (ending June 2009), and Standard & Poor’s expects them to contract again in 2009/10. Compounding revenue vulnerability is The Bahamas’ reliance on the taxes on international trade and transactions (more than 50% of tax revenue) ); the government aims to minimize their decline by modernizing collection mechanisms, especially at customs.

The country’s dependence on one product (tourism accounts for more than 50% of GDP and employs over 50% of labor force) and one market (U.S. tourists account for more than 80% of total) colors prospects for a robust economic recovery given that Standard & Poor’s forecasts a weak U.S recovery. The Bahamian hotel industry does not expect a meaningful revival of tourism until 2011. In addition, once-buoyant prospects for a major expansion of tourism projects are now far more muted. Although high-end niche projects continue to advance, many others are delayed. In the midst of the slowdown in tourism and construction, unemployment has risen to the highest levels since early 1990s and is projected to close the year at about 14%, a jump from 8.7% in 2008.

The stable outlook reflects Standard & Poor’s expectation of a gradual tightening of the government’s fiscal stance and generally stable external financing profile. The Bahamas’ tourism sector is expected to improve only as the U.S. economy recovers. In the meantime, the government is working to put the offshore financial sector, a second economic pillar, on a stronger footing after it was included on the G-20/OECD grey list of offshore financial centers. The authorities have negotiated 10 Tax Information Exchange Agreements (TIEAs), an important step to getting off the grey list. Although The Bahamas’ external financing gap (defined as current account payments plus short-term debt plus medium- and long-term amortization) is high at 135% of current account receipts and useable reserves, it improved in 2009 amid lower current account deficit and higher international reserves. Importantly, the government’s external amortization needs are low, and the bank’s foreign depositor base remains stable. We expect financing needs to remain, on balance, little changed in 2010-2011.

“The ratings could come under downward pressure if The Bahamas’ fiscal deterioration persists and the economic base erodes more severely,” Ms. Schineller added. “Conversely, the ratings could improve following a more proactive government policy response to reduce debt levels or if the commonwealth’s economic prospects strengthen.”