Standard & Poor’s downgrades the Bahamas

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.”

First Citizens Bank wins at the The Banker Awards 2009

T&T’s FCB won a country award at The Banker’s 2009 ceremony (link).

First Citizens Bank

Last year, Trinidad and Tobago was significantly affected by the meltdown of the largest conglomerate in the Caribbean, the CL Financial Group. This affected the whole of the local financial system and economy, and had a knock-on effect on First Citizens Bank’s loan book. Further, the government-owned bank had to assist with the restructuring of loan facilities, raising new capital and allocating management time to addressing the various issues arising from the crisis.

First Citizens Bank’s solutions not only helped the local economy, they also provided growth for the bank itself. The acquisition of some troubled institutions were turned to the bank’s advantage and confirmed its counterparty credit rating (BBB+/A2) by Standard & Poor’s, the highest among local banks.

“First Citizens, as a bank owned by the government, was called upon to assist with the management of the crisis,” says chief executive Larry Howai. “The end result has been the maintenance of stability within the local financial system. In addition, the bank was able to acquire a solid base of new customers from the [troubled] CL Financial Group and also acquired [Caribbean Money Market Brokers], one of the premier brokerage houses in the Caribbean. This has resulted in increased profitability, a 70% increase in the bank’s asset base and a presence in several Caribbean islands.”

Last year’s results have encouraged the bank to aim even higher for the future and to look at acquisition targets in the region.

“Our main focus in the coming year will be on risk management, close monitoring and management of our loan and investment portfolios and strategic expansion in key markets,” says Mr Howai. “This latter will include potential acquisition opportunities both locally and in the Caribbean region.”

Standard & Poor’s unimpressed with Barbados’ finances

Rating agency Standard & Poor’s continued its focus on the Caribbean with a note on Barbados’ public finances. Below in full, highlighting mine:

Barbados Outlook Revised To Negative On Deteriorating Public Finances; ‘BBB’ And ‘A-3’ Foreign Currency Ratings Affirmed

— We believe the timeliness and magnitude of Barbados’ fiscal consolidation is uncertain because of a worse-than-anticipated economic recession.

— We’re revising the outlook on Barbados to negative from stable.

— We’re affirming the ‘BBB’ long-term and ‘A-3’ short-term foreign currency sovereign credit ratings.

The negative outlook reflects the possibility of a downgrade if the authorities fail to consolidate the general government deficit (estimated at 7.1% of GDP in 2009) and to curb the rising debt. We forecast net government debt at 52% of GDP this year, up from 42% just three years ago.

NEW YORK, Nov. 13, 2009–Standard & Poor’s Ratings Services said today that it revised its outlook on Barbados to negative from stable. At the same time, we affirmed the ‘BBB’ long-term foreign and ‘BBB+’ long-term local sovereign credit ratings. The short-term ratings remain at ‘A-3’ for foreign currency and ‘A-2’ for local currency. The transfer and convertibility assessment for Barbados is ‘BBB+’.

“The outlook revision on Barbados to negative is due to our view that the timeliness and magnitude of the government’s fiscal consolidation, necessary to preserve Barbados’ credit fundamentals at the current ‘BBB’ level, is uncertain because of a worse-than-anticipated economic recession in the country,” said Standard & Poor’s credit analyst Olga Kalinina. Results for the first three quarters of 2009 underscore a rapid deterioration in Barbados’ public finances, at a faster rate than we had previously assumed, and a sharper economic contraction. We have revised Barbados’ real GDP estimate to negative 4.8% in 2009 (from our previous estimate of negative 2.5%), with a further decline of 1% expected in 2010, before a return to growth in 2011.

Also, we have made a significant revision to our expectations for the government’s fiscal deficits, both for 2009 (based on three quarters of 2009 data) and for the last three years (based on new information on the off-budget activities). We now expect the general government deficit at 7.1% of GDP in fiscal 2009 (ending March 31, 2010), up from 5.6% last year, 6% in 2007, and 3.8% in 2006. This encompasses the central government deficit of 9.1% of GDP (including 0.5% of off-budget deficit) and the National Insurance Scheme (NIS) surplus of 2%.

Our projections incorporate an assumption of a gradual reduction in the fiscal deficits starting in 2010, although the debt is likely to peak in 2010 at 55% of GDP (on a net basis), before starting to decline in 2011. We note that there is support across the political spectrum, private sector, and unions for fiscal tightening and that the government is preparing a medium-term framework to address the situation. The risk to our projections, however, is the timeliness and efficiency of the anticipated measures amid a slowing economy and rising unemployment.

The negative outlook reflects the possibility of a downgrade if the authorities fail to contain fiscal deficit widening this year and reduce fiscal deficits starting in 2010. Conversely, rapid consolidation of public finances, most probably accompanied by a return of foreign investment, would restore strength to Barbados’ balance sheet and support the stable outlook. We will closely watch the trends in Barbados’ international reserve levels in order to identify any potential stress on its external liquidity position and currency peg.