Even as it affirmed its ratings for The Bahamas and maintained its negative outlook, ratings agency Standard and Poor's (S&P) avowed that it does not believe the recent revelations concerning The Bahamas and Panama law firm Mossack Fonseca will lead to the country being placed again on the so-called "grey list" or worse.
In fact, close to 16,000 of Mossack Fonseca's offshore companies were Bahamian, making The Bahamas the firm's third favorite jurisdiction to form companies behind the British Virgin Islands and Panama itself. Still, S&P said, "Despite the recent leaks of offshore bank accounts in The Bahamas by Panamanian law firm Mossack Fonseca, along with accounts in other offshore financial centers, our ratings affirmation is premised on our belief that these leaks won't result in the country falling back on the Organisation for Economic Co-operation and Development's 'grey list' for financial centers operating as tax havens. The country was removed from the grey list in 2010.
The affirmation also assumes that these leaks won't affect the banking sector's ability to roll over its debt.
And according to Central Bank of The Bahamas (CBOB) Governor John Rolle, local banks are "making individual enquiries to the Central Bank" in connection to the Mossack Fonseca leaks. The matter rose to the level that the regulator issued a request for the banks to signal CBOB if they had "any material concerns about the publicized data".
Growth of 1.2 percent
Meanwhile, S&P is forecasting real GDP growth of 1.2 percent in 2016 and 1.5 percent in 2017, a "below-average" growth pattern set to last over the next several years, which is a far cry from Prime Minister Perry Christie's more optimistic growth prediction of 1.5 percent in 2016 and 2.0 percent in 2017. The International Monetary Fund (IMF) has also projected real GDP growth to increase to about 1.5 percent in 2016, supported by the continued rise in tourism arrivals, which will receive an additional boost when Baha Mar opens.
The S&P projection is explained in analysis by Primary Credit Analyst Julia L Smith, released on April 15, 2016.
Among other highlights, Smith pointed out that official net foreign direct investment (FDI) inflows have continued to fall -- although the analyst estimated that "errors and omissions" in the budget likely represented underreported FDI or tourism flows -- contributing to The Bahamas' extremely high external liquidity needs, and, added to growing external debt, keeping the rating negative.
In the analysis of why the agency maintained its "BBB-/A-3" foreign and local currency sovereign credit ratings on The Bahamas, kept the outlook negative, and maintained its transfer and convertibility assessment for The Bahamas at "BBB", S&P analyst Julia Smith pointed out that although official net foreign direct investment (FDI) inflows continued to fall, net errors and omissions shot up, financing nearly 80 percent of the current account deficit (CAD) in 2015, compared with 23 percent a year earlier.
"While large errors and omissions complicate the analysis of CAD financing and the country's overall external balance sheet, we estimate that these errors and omissions likely represented underreported FDI or tourism flows, which qualitatively diminish liquidity risk to the still-large current account position.
"Nevertheless, The Bahamas' external liquidity needs, though diminishing, remain extremely high, and this, combined with large errors and omissions and growing external debt, weighs on the rating," Smith said.
"Including the full international investment position of the country's banking sector, instead of netting off external assets, we expect the net external financing needs of the public and financial sectors to reach 537 percent of current account receipts (CAR) in 2016, reflecting the still-high CAD as well as the high rollover needs of the financial sector.
"However, we consider the sector's external assets highly liquid, which somewhat diminishes liquidity risk. We expect external liquidity needs to decline over the next three years though remain above 400 percent of CAR through 2019. Additionally, the net external debt of the public and financial sectors has risen from 14 percent of CAR in 2009 to an estimated 52 percent of CAR in 2015, and we expect this to continue to rise to 54 percent this year. These figures do not include the external debt and FDI in the island's substantial tourism sector," Smith said.
Baha Mar drag
S&P stated that growth in The Bahamas remains sluggish, and the uncertainty surrounding the prolonged $3.5 billion Baha Mar resort opening delay has continued to jeopardize the country's fragile growth prospects.
The analysts said it is a "positive development" that the government has not taken the project on its balance sheet, but pointed out that the close to 2,000 employees that were hired in anticipation of the opening last year have been left without jobs since October 2015, and local Bahamian creditors who are owed a reported debt upwards of $170 million have been left unpaid.
According to S&P, that uncertainty surrounding the project's resolution likely contributed to low real GDP growth of 1 percent in 2015 and will subdue domestic demand over the next year.
"These expectations, along with the economy's growth bottlenecks such as structurally high unemployment -- which reached 14.8 percent as of November 2015 -- plus high household debt and persistently high loan arrears in the banking system and risks to the competitiveness of the country's tourism industry, lead us to believe that growth will remain sluggish in the forecast horizon.
"We forecast real GDP will grow by 1.2 percent in 2016 and 1.5 percent in 2017. Our expectation for below-average growth over the next several years follows over a decade of negative real per capita GDP growth on average, which is lower than The Bahamas' peers that have a similar level of GDP per capita," the analyst said.
K. Quincy Parker
Guardian Business Editor
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