True to its word, Moody's Investors Service yesterday downgraded The Bahamas' sovereign credit rating following a review initiated in July.

The ratings agency lowered the bond and issuer ratings of the government of The Bahamas one notch, to Baa3 from Baa2, despite the threat that they could have been lowered even more.

Low medium-term growth pointing to "weaker economic strength relative to similarly-rated peers", and the "persistent increase in the government's debt ratio leaves The Bahamas with less fiscal space relative to rating peers", said Moody's in explaining the downgrade.

As it stands, the credit rating remains "investment grade" status, a relief for the government, as it could have been looking at disastrous aftershocks should the rating have fallen below that mark. Moody's also announced lowering of the risk ceilings for The Bahamas' long-term and short-term financial obligations.

Dismal economic growth, ballooning debt in recent years and government's inability to meet its own projections were among the main concerns that prompted the recent review, according to Moody's. And though yesterday's downgrade echoed those issues, Moody's did provide a bright spot in returning the country's economic outlook to stable from the negative watch status it was placed on this summer.

Persistently high unemployment, non-performing loans in the banking system and a decrease in the competitiveness of the tourism sector, were reasons given for the "first driver" that led to the downgrade.

Moody's said it expects The Bahamas' economic performance over the next five years "will likely remain subdued and constrained by structural rigidities".

"Moody's forecasts that the Bahamian economy will recover in 2016-20, with real GDP growth expected to average 1.3 percent during this period, the fourth weakest economic performance out of the current 22 Baa-rated sovereigns," it said.

"While authorities have implemented some measures to address these issues and have put forward a pro-growth reform agenda via the National Development Plan, progress has been slow so far."

Moody's also said it is not as optimistic as the government when it comes to getting debt under control.

It pointed out the Christie administration's "medium-term plan forecasts continued deficit reduction and a balanced budget by 2018/19 on the back of strong revenue growth mainly from VAT (value-added tax) and a reduction of expenditures in real terms after 2016/17".

"According to the authorities this will lead to a reduction in the government's debt/GDP ratio, closer to 60 percent of GDP," Moody's said.

However, Moody's projections weren't nearly as bullish as the government's.

"Moody's baseline, which incorporates a more gradual fiscal consolidation path, forecasts that the debt/GDP ratio would peak in 2016/17 at about 67 percent and then stabilize around 65 percent," the agency said.

"In addition, the Bahamian government has a moderate interest burden, with an interest-to-revenues ratio of about 13 percent."

That gives the country "limited fiscal space", according to Moody's, "reducing The Bahamas' capacity to respond to economic shocks".

The agency also didn't rule out a further downgrade.

It said "downward rating pressure could emerge if the government's commitment to fiscal discipline diminishes", delaying debt stabilization projections.

"Slower than anticipated economic growth, particularly if it lowered government revenue growth, a key component of the deficit reduction strategy, would also be credit negative," Moody's said.

"The rating could also be downgraded if the government's contingent liabilities, in the form of guaranteed debt of state-owned enterprises, were to crystallize on the government's balance sheet."

However, the government could also see its credit rating rise, according to Moody's.

"A strengthening of budgetary processes, including expenditure controls and improvements in revenue collections that lead to a rapid deficit reduction would be credit positive," Moody's said.

"Upward rating momentum would also emerge if implementation of structural reforms fostered higher potential growth and contributed to a significant improvement in The Bahamas' debt metrics, aligning these with Baa medians."

The Ministry of Finance yesterday responded to the downgrade by admitting disappointment, but expressing confidence that the downgrade would be temporary, given Moody's stable outlook of the economy.

"The government's perspective on the Bahamian economy remains positive and its commitment undeterred in pursuing the necessary policy reform measures and initiatives to secure durable growth, accompanied by broadened employment opportunities and greater fiscal sustainability with debt reduction," the ministry said.

"To this end, the government is moving swiftly to advance the many real sector initiatives underway that are poised to deliver, over the near-term horizon, further concrete, measurable contributions in these key economic policy areas."

Jayme C. Pinder, Guardian Staff Reporter

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