International credit ratings agency Moody's Investors Service yesterday downgraded The Bahamas' sovereign credit rating yet again, citing massive debt and soft economic growth as the main factors behind the move.
The downgrade could make it more expensive for the country to borrow and add to the already daunting amount of money spent on just servicing government debt.
However, the Ministry of Finance stressed yesterday that the country's credit rating remains at an investment grade level.
Though the downgrade of the country's issuer and senior unsecured ratings to Baa2 from Baa1 was definitely bad news, Moody's changed the country's economic outlook to stable from negative - an expression of confidence in the Christie administration's fiscal consolidation plan, coupled with a prediction that a recovering U.S. economy will bolster GDP growth in The Bahamas.
However, the rapidly rising level of government debt was the main thrust behind the downgrade, the second from this particular agency since December 2012.
"The government's debt-to-GDP ratio has increased from 31.7 percent in 2007 to 59.0 percent in 2013, and Moody's expects it to peak in 2015. At this level, it is almost 20 percentage points above the median for Baa-rated sovereigns (39.5 percent in 2013)," Moody's said.
"Concurrently, as the debt stock increased, the interest burden on government debt has risen during the same time period. Interest payments now represent over 14 percent of government revenues, compared to 9.3 percent in 2007 and above the current Baa-median of 8.3 percent."
The next biggest reason for the downgrade would be the economy, Moody's said.
The agency pointed to the economy's lackluster performance since the 2008/09 fiscal year.
The Bahamas has had an average of 1.1 percent growth since that year through 2013, Moody's noted.
"The economy's underperformance has negatively affected government revenues, and it has also led to higher current and capital expenditures by the government in order to support the economy," said Moody's.
That government support has led to gargantuan deficits that are "more than double the median of similarly rated peers".
However, Moody's believes that the government's plan to arrest this trend beginning in 2015 by cutting spending and implementing the controversial value-added tax regime, seems doable.
"Key elements of the fiscal stabilization plan include expenditure controls that seek to increase the efficiency of public spending," Moody's said.
"In addition, government intends to introduce a 7.5 percent valued-added tax in 2015.
"Nonetheless, even with an effective implementation of fiscal reforms, The Bahamas' debt and interest burdens will remain at levels significantly weaker than most Baa-rating peers over the next two years at least, and over the medium term as well."
The fiscal consolidation plan, Moody's said, should coincide with economic recovery in the U.S. and lead to somewhat stronger GDP growth of two to 2.5 percent in 2015.
Moody's said the country's credit rating could move upward if debt levels fall to those that are closer to our similarly rated peers and by dumping "contingent liabilities stemming from loss-making public sector corporations".
However, the credit rating could continue to fall if the economy underperforms and complicates the fiscal consolidation process.
Increased public spending will also put the credit rating at risk, Moody's said.
Increased debt incurred by public corporations that require government intervention would also result in a loss of creditworthiness, Moody's said.
The Ministry of Finance released a statement in response to the downgrade last night, highlighting the upgraded economic outlook, claiming it was "premised on the strength of a very credible fiscal reform plan and a stronger forecast for economic growth".
"The ratings agency rightly expresses confidence that the current program of reforms to boost revenues and to control expenditure and increase the efficiency of spending will yield positive results," the ministry said.
"These reforms are indeed expected to have the intended outcome of reducing the deficit and supporting a 'gradual reduction' in the government's debt burden over the coming years.
"As Moody's expectations underscore, on this course of action the Bahamian economy should strengthen, despite worries to the contrary in some quarters about the merits of the fiscal plan. The government of The Bahamas must persevere with these reforms."
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