Moody's, the international credit rating agency, yesterday downgraded its outlook for the Bahamian economy from stable to negative, pointing to the significant run up in government debt levels in recent years and the country's limited growth prospects.
However, Moody's affirmed The Bahamas' A3 bond rating -- a move the government last night welcomed as any downgrade in this regard would have negatively impacted the country's credit worthiness. The ratings of these agencies affect interest rates when borrowing money, and also the ability of countries to borrow.
In revising the outlook from stable to negative, Moody's also cited the challenges the government is likely to face in raising revenues.
Moody's said while the pace of the increase in the government's debt levels is likely to slow in the coming years, a failure by the government to reverse the recent trend of rising debt would likely result in a downgrade of The Bahamas' rating.
"In order for the outlook to return to stable, the government would need to demonstrate a credible plan not just for stabilizing debt, but for reducing it to a level more consistent with the current A3 rating," Moody's said.
The government in a statement last night said it is pleased to learn that Moody's has affirmed its A3 bond rating, and acknowledged the rating agency's revised outlook of the Bahamian economy.
The government noted that the recent global economic and financial crisis profoundly impacted the Bahamian economy and required extraordinary levels of spending on the part of the government to safeguard the financial system, boost economic activity and provide assistance to Bahamians badly in need of help in these trying times, at a time when government revenue experienced precipitous declines.
"The unusually high rise in debt levels therefore was not surprising and in fact was forecasted by the government in light of the worst global economic and financial crisis since The Great Depression.
"Despite this, we maintain in the circumstances a debt-to-GDP ratio that is one of the lowest in our region," the government said.
Moody's noted in its statement that the government's debt increased by almost 150 percent over the past decade to nearly 50 percent of GDP at the end of 2010.
Debt rose steadily between 2000 and 2008, but over 40 percent of the increase occurred in the past two years alone, Moody's said.
"As a result, The Bahamas' debt levels, which were at the median for its rating range until 2006, are now nearly 40 percent higher than the median," the rating agency said.
"Its relatively high wealth levels -- The Bahamas' GDP/capita is nearly twice the median for the rating range -- enable The Bahamas to support a somewhat higher level of debt at a given rating level relative to other countries, but not 40 percent higher."
Moody's said that given The Bahamas' historically low growth rates it is unlikely that it will be able to grow out of its debt burden, notwithstanding certain recent developments that may give a lift to the economy over the next few years.
The agency noted The Bahamas' economy is highly dependent on tourism, particularly from the U.S. -- the near-term economic prospects of which appear increasingly uncertain. In addition, the offshore financial sector, The Bahamas' second most important industry, is facing a rising degree of competition, Moody's said.
"Consequently, the only way that debt levels will decrease is if the government is able to reverse the fiscal deficits it has generated over the past several years and begin to repay a portion of its debt. With expenditures still quite low despite recent increases, in all likelihood the government will have to rely on tax increases and/or the introduction of new taxes in order to accomplish this," Moody's said.
It added that while the high degree of political consensus that has historically characterized the country remains one of its most significant credit strengths, Moody's believes that tax increases could nevertheless become politically contentious and difficult to implement.
"The negative outlook reflects Moody's expectation that given the country's limited growth prospects, the government will have difficulty achieving a meaningful reduction in currently elevated debt levels in the near-to-medium term unless it is able to significantly increase revenues," Moody's said.
GOVERNMENT'S RESPONSE
In its statement last night, the government emphasized its continuing goals: To reduce the level of deficit spending, as is proposed in the 2011/2012 fiscal budget relative to the crisis period; reduce the growth rate of the debt-to-GDP ratio as again is proposed in the current budget and eventually decrease the debt to-GDP levels in order to re-establish the fiscal space the country enjoyed prior to the onset of the crisis.
"We acknowledge that there are challenges in the global economic environment generally, but more particularly that of the United States of America to pursuing these aims but our focus in achieving them will not be diminished," the government said. "Both the medium term and long term well-being of our people depend on our achieving these objectives."
The government said its efforts in this regard are focused on promoting broad economic growth, through innovative marketing programs in tourism and pursuing new opportunities for international financial services and increased investment promotion.
The government has also pledged to expand support to and opportunities for small and medium size enterprises, increase the ease with which business is done in The Bahamas, modernize the nation's infrastructure and pursue a fiscal policy that reduces the debt burden and creates an optimum environment for economic growth and prosperity for Bahamians.
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