Credit rating agency Standard and Poor’s (S&P) has affirmed The Bahamas’ credit rating at B+ and its outlook as stable in its latest credit opinion report on this country. It explained that the stable outlook also supposes no adverse impact on the country, especially from the recent collapse of locally headquartered cryptocurrency exchange FTX Digital Markets.
S&P also explained that this country’s real gross domestic product growth will slow next year to 1.1 percent.
“The pandemic, low historical growth, and repeated natural disasters have weighed on the country’s economy,” S&P said.
“Despite good growth over the next two to three years, our assessment of the sovereign’s creditworthiness reflects its below-average, long-term growth performance compared with that of others at a similar level of development.”
On FTX, the report explained: “To foster the local fintech sector and open the country to opportunities in the digital asset space, the government recently introduced the Digital Assets and Registered Exchange (DARE) Act,” the S&P report said.
“The local economy benefited from the activities of a digital exchange over the past year, however, this sector may face setbacks as FTX, a digital asset exchange headquartered in The Bahamas, recently filed for bankruptcy.”
The S&P said that leaving the country at its currency credit rating, which it downgraded the country to last year, reflects its view that economic growth will shore up government revenues and reduce the pressure on government expenditure, leading to a lower deficit in the next year.
S&P added that it is expecting “continued, but decelerating growth” in The Bahamas’ national debt, and the country to fund much of its financing needs domestically and through multilateral lenders.
S&P said it could improve the country’s rating in 12 months if the government’s financial reforms hasten; it proves its ability to increase revenue; it sustains “near-balanced” financials and improves the country’s economic prospects.
“There has been a meaningful improvement in The Bahamas’ economy over the past 12-18 months, spurred by the important tourism sector, although it remains below pre-pandemic levels,” the report said.
“The expanding economy is supporting government revenues, which increased almost 29 percent in the most recent fiscal year, while higher employment is shrinking the government’s social expenditures.
“Deficits have fallen to six percent of GDP in fiscal year 2022 from 13.7 percent in fiscal 2021, and are expected to fall even further in the current fiscal year.
“Although The Bahamas’ debt burden rose following Hurricane Dorian and the onset of the COVID-19 pandemic, a growing economy and smaller deficits have resulted in slower growth in debt.
“Interest expenses are higher than pre-pandemic levels and we expect the country’s interest burden will remain above 15 percent of revenues over the next one to two years. The government’s external liabilities are increasing, and we believe the country remains vulnerable to external shocks, while the fixed exchange rate limits its monetary policy flexibility.”
S&P said while the government is intent on increasing its revenue collection to 25 percent of gross domestic product (GDP), shrinking expenses to 20 percent of GDP and capital spending to 3.5 percent of GDP by fiscal year 2025/2026, it does not believe government can achieve its results without new taxes or “material spending cuts”.
“The rapid increase in debt over the past few years means The Bahamas’ previous fiscal consolidation plans will likely be insufficient to meet the country’s debt targets without material new revenues, significant cost cutting, or economic growth well above historical averages,” the credit rating agency said.
“Furthermore, the country remains vulnerable to environmental risks. We believe the country’s track record of slow progress in reforming public finances and key sectors of the economy has contributed to the weakening of its financial profile over many years and hurt its economic performance. Most notably, failure to advance public financial reform has led to a marked increase in the sovereign’s debt burden.
“We expect declining deficits and a growing economy will lead to a slow decline in The Bahamas’ net debt burden and incremental financing needs. However, the country remains vulnerable to refinancing risks based on its significant short-term debt, with almost 24 percent of debt maturing in the next year.”
S&P added that despite the expansion in tourism and tourism-related projects that will spur economic growth, the sector remains volatile.
“The Bahamas’ economy remains concentrated in tourism, which typically contributes at least 40 percent of GDP,” the report said.
The report said the S&P expects The Bahamas’ net debt burden to decrease to “72.3 percent of GDP by the end of 2023 from 83.1 percent in 2020, while interest payments will remain above 15 percent of government revenues for the next three or more years”.
It said the government’s interest payments that come in at 19 percent of revenue reduces its ability to meet economic and social spending goals.