Moody’s has revised its previous position that the country would begin to see tourism growth in the first half of 2021, the global ratings agency stated in an updated credit opinion on The Bahamas released yesterday.
Moody’s noted in its statement that it now does not expect a material increase in The Bahamas’ tourism numbers until the latter half of this year, as vaccinations in the United States increase and subsequently, demand for travel.
“Tourism did not recover in the last quarter of 2020,” Moody’s stated. “The significant decline in tourist arrivals, coupled with the high number of COVID-19 cases in the US – The Bahamas’ main source of tourists – has led us to revise our previous expectation that tourist flows would recover in the first half of 2021.
“We now expect the economic rebound in 2021 to be lower and GDP growth in 2022 to be higher than our previous forecast. This expectation relies on the assumption that tourism will not increase materially until the second half of 2021, as vaccination efforts bring the pandemic under control in the US and restore the appetite for international travel.”
Moody’s stated that given this outlook, coupled with declines in revenue in the first quarter of fiscal year 2020/2021, The Bahamas will face a weaker fiscal profile.
The rating agency noted that while its numbers do not vary greatly from the government’s forecasts, it expects the country’s fiscal deficit to reach 11 percent in fiscal year 2020/2021 and only narrow significantly by fiscal year 2022/2023. Moody’s added that the country’s debt will stabilize at 80 percent of GDP by 2022, leaving The Bahamas’ debt burden ten percentage points higher than the average for other sovereigns with a similar ‘Ba’ credit rating within the 2021-2022 time frame.
“The substantial drop in revenue, coupled with an expectation of slower economic recovery, has led the authorities to revise their fiscal targets compared with those laid out in the budget presented in May 2020,” Moody’s pointed out.
“The authorities have widened the target deficits for the next three fiscal years and announced increased expenditure restraints, with a specific focus on state-owned enterprises, which have long received support from the central government.
“Only for fiscal 2020-2021, the authorities have announced cuts to planned capital spending to immediately contain this year’s deficit. The poor revenue of the first quarter of fiscal 2020-2021 and the delayed pickup in tourism have also led us to widen our deficit forecasts. We had also expected the government could execute less capital expenditure than budgeted as a deficit-containment measure.”
Moody’s stated that The Bahamas’ credit profile will continue to face downside risks over the next two years because of the severity of the impacts from Hurricane Dorian and the COVID-19 pandemic.
It added that there remains “significant uncertainty” surrounding the recovery of the tourism industry.
“If, in particular, the recovery in 2021 is weaker than expected, government revenue will come under additional strain and the government’s fiscal strength will further erode,” Moody’s stated.
“The prospects for debt stabilization are highly susceptible to The Bahamas’ economic performance in 2021 and 2022. There is also a risk that the market sentiment toward The Bahamas may not improve enough to enable the government to finance its larger funding needs over 2021-2022. Although its favorable debt maturity profile mitigates some risks related to government liquidity (the next global bond is not due until 2024), the country’s limited market access could create external liquidity strain.”
Moody’s noted that a rating upgrade for The Bahamas is unlikely, but explained that it could upgrade its credit profile if the government is able to successfully finance its larger borrowing requirements this fiscal year and if the tourism sector is able to grow and generate substantial revenue.
Focusing on factors that could lead to a downgrade, Moody’s stated, “Downward rating pressure could emerge if the government were to face heightened liquidity strain that limits its ability to fund its larger fiscal deficits over 2020/2021 and 2021/2022, resulting in a more significant decline in The Bahamas’ foreign exchange reserves. In addition, if the prospects for debt trend stabilization beyond 2020/2021 were to weaken because of poor economic growth or limited fiscal consolidation, it would be credit negative for The Bahamas.”