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Downgrade blamed on the failure of successive governments to implement timely and effective fiscal reforms even prior to COVID-19

International credit ratings agency, Standard & Poor’s (S&P) has downgraded The Bahamas’ sovereign creditworthiness citing, “the failure of successive governments to implement timely and effective” fiscal reforms even prior to COVID-19.

With this downgrade, S&P joins its rival credit rating agency, Moody’s, in plunging The Bahamas sovereign bonds further into so-called ‘junk’ status.

This was done by slashing its long-term and local currency rating to ‘B+’ from ‘BB-‘ after the national debt increased by US$2.4 billion in just two years. However, S&P broke with Moody’s in simultaneously providing The Bahamas with a glimmer of hope by upgrading its “outlook” for this nation’s public finances from ‘negative’ to ‘stable’. 

S&P based this upgrade outlook on signals no further downgrade of The Bahamas is expected within the next 12 months. This is based on its expectation that the economy’s post-COVID recovery will drive increased revenues and narrow the Government’s annual fiscal deficit despite the absence of major reforms.

“The stable outlook reflects our view that the economic recovery presently under way will support government revenues and reduce pressure on government expenditures, supporting a gradual decline in fiscal deficits over the next 12 months,” S&P reported in its Bahamas country analysis. 

Continued, but decelerating growth expected in the national debt

“We expect continued, but decelerating, growth in the national debt,” S&P has assessed.

The ratings agency is predicting that the Bahamian economy will expand by the equivalent of 3.7 per cent of gross domestic product (GDP) in 2021, a rate that is higher than projections by both the International Monetary Fund and the Central Bank of The Bahamas.

 However, while its 8.6 per cent GDP growth projection for 2022 is higher than others’ estimates, S&P voiced concern that “slow progress” in enacting fiscal reforms had undermined the Government’s finances even before the double blow inflicted by COVID and Dorian.

S&P said that, “although successive governments have continued to work on policies and legislation to support their fiscal responsibility mandate, they have not enacted material revenue measures or sustained expenditure cuts”.

The ratings agency added that it anticipated the 10 per cent Value Added Tax rate cut will be “revenue neutral”.

“We believe the new administration will take time to assess the country’s fiscal and debt situation, which may further delay the implementation of new fiscal measures,” the rating agency stated.

It added: “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.”

S&P has also assessed that, “most notably, failure to advance public financial reform has led to a marked increase in the sovereign’s debt burden”.

S&P’s action likely to trigger an increase in the Government’s borrowing costs

For the Bahamian public, the significance of S&P’s action is a further potential increase in the Government’s borrowing costs and associated debt service payments, which will threaten to suck resources away from public services such as health, education, social services and the security forces.

It said investors will likely seek higher interest rates on Bahamian sovereign debt to compensate for the extra risk due to the Government’s loss of creditworthiness. 

This, in turn, will lead to the higher debt servicing costs that will ultimately have to be paid by the Bahamian taxpayer.

The timing of S&P’s action could impact both the Government’s planned US$700 million foreign currency bond, and Bahamas Power & Light’s US$535 million rate reduction bond, by imposing higher interest rates if both go to market in 2022. 

Also, the downgrade could hit foreign direct investment and associated confidence, as investors will have to factor increased country and fiscal risks into their decisions as to whether to deploy capital on projects in this nation.