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Moody’s places Bahamas on downgrade review over COVID-19

As it forecasted an eight percent “contraction” in Bahamian economic activity this year, Moody’s announced yesterday that it has placed The Bahamas’ Baa3 ratings “on review for downgrade”.

“The decision to place The Bahamas’ ratings on review for downgrade reflects significant risks to its economic and fiscal metrics as a result of the coronavirus outbreak,” Moody’s said in a statement.

“The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets.

“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.

“A likely deep economic contraction, combined with higher fiscal deficits could lead to a permanently higher debt and interest burden that is already elevated relative to Baa3 peers.”

Moody’s said the review will allow it the opportunity to assess “the likely impact” of the COVID-19 pandemic on “key credit metrics in 2020 in addition to effects on the sovereign’s economic and fiscal strengths over the coming years”.

“Additionally, Moody’s will assess the policy response to the shock as well as the government’s plan to resume fiscal consolidation efforts beyond the current fiscal year,” it said.

Moody’s added, “We would downgrade the rating if the review were to conclude that The Bahamas economic and fiscal fundamentals were going to materially deteriorate as a consequence of the coronavirus shock such that its current Baa3 rating was no longer aligned to the sovereign’s credit fundamentals.

“A medium-term policy response that did not support the arrest of the fiscal deterioration over the coming years, leading to a high likelihood of a continued upward trend in the debt ratios, would contribute to this rating outcome.”

The global economy has come to a near standstill as the world grapples with a worsening COVID-19 pandemic.

As a result, many cruise lines and airlines have suspended operations.

This, along with the Bahamian government’s decision to closed the borders, has brought tourism in The Bahamas to a halt.

Moody’s said, “The decision to place the ratings on review for downgrade reflects the significant expected decline in economic output in 2020 due to a large shock to the tourism sector. Tourism’s direct contribution to Bahamian GDP is close to 20 percent of the total, while its indirect contribution through other sectors represents another estimated 20 percent of GDP.

“As a consequence of the spread of the coronavirus disease, The Bahamas has limited the inflow of visitors, while other countries have also imposed travel bans.

“In particular, travel restrictions from the United States — origin of over 80 percent of stopover visitors — as well as Canada and the European Union  — origin of 7 percent of stopover visitors each — will lower the inflow of tourists into The Bahamas for several months. The government has also imposed movement restrictions within its borders so as to contain the spread of the disease among the local population.”

It said the tourism decline will also “likely lead to a deterioration” of The Bahamas’ current account balance, noting that the decrease in oil prices and “a likely fall in import demand related to tourism activities will mitigate the widening of the external deficit”.

“The central bank’s foreign exchange buffers were also at a relatively high level prior to the coronavirus shock, which should also diminish external liquidity pressures,” Moody’s said.

It said these developments will weigh “significantly” on economic activity during the first half of the year.

As a result, Moody’s said, it forecasts “a contraction in economic activity of about 8 percent this year, compared to an estimate of 0 percent growth previously”.

“The virus outbreak is compounding the fiscal and debt challenges facing the government,” Moody’s said.

“The fiscal policy response to the coronavirus and the likely loss in government revenue due to lower economic activity will likely lead to wider deficits in fiscal 2019/20 to over 5.5 percent of GDP and more gradual fiscal consolidation in future years.

“This would push The Bahamas’s debt metrics higher, further weakening its fiscal strength and widening the gap with its Baa3-rated peers.

“During the review period, Moody’s will assess the government’s short-term response to the ongoing shock and its fiscal plans for the next few years as set in the 2020/21 budget to be tabled in May.

“The review will look at the effectiveness of the plan in containing the weakening of the debt metrics and, over the medium term, the country’s ability of the country to reduce its debt load.”

Moody’s noted that the COVID-19 pandemic is affecting The Bahamas “at a time when economic performance had already been hit by Hurricane Dorian in September 2019”.

“During the review, Moody’s will explore the lasting effects these shocks will have upon The Bahamas’ economic strength, by assessing the effectiveness of containment measures in The Bahamas and other countries but also any structural shifts in the tourism industry that may result from the pandemic,” it said.

“Prospects for the resumption of reconstruction efforts in the islands affected by Hurricane Dorian, as well as new foreign direct investment (FDI) projects in these locations will also be considered in evaluating the country’s medium-term growth potential.

“Assessing the effect of the ongoing health crisis on the cruise sector will be important, as some key FDI projects in the pipeline are headlined by cruise ship companies.”

Moody’s said the pandemic will weigh on The Bahamas’ fiscal strength metrics.

It also noted that The Bahamas’ long-term foreign-currency bond ceiling remained unchanged at Baa1.

“Its long-term foreign-currency bank deposit ceiling is unchanged at Baa3,” it said.

“The short-term foreign-currency bond and bank deposit ceilings remain unchanged at P-2 and P-3, respectively. The long-term local currency country risk ceilings are unchanged at A2.”

 

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