In the Moody’s Global Sovereign Rating and Report 2009, the credit agency said while it is concerned with the increase in The Bahamas’ debt burden, its history of sensible fiscal management and strong policy consensus support the government’s view that debt numbers will start trending down once the worst of the crisis is over.
"Can this lead to a downgrade of The Bahamas ratings? The short answer is, not yet," the report said.
"But, if the increase in debt numbers remains unchecked, it will place strong downwards pressure on the current ratings and could lead to a change in outlook and ultimate downgrades into the Baa category."
Moody’s noted that The Bahamas is one of the countries that is most exposed to economic events in the United States, as the US buys 65 per cent of The Bahamas’ exports and is the most important source of foreign direct investment and tourist inflows.
Visitors from the US account for more than three quarters of total tourist arrivals.
"The economic crisis in the US is a key factor explaining what could turn out to be three years of negative growth for the country. GDP fell 1.7 per cent in 2008 and the IMF is forecasting a 3.9 per cent drop this year and another fall in 2010," the report said.
"The impact on the country from the world crisis is likely to be worse than the impact of the terrorist attacks of September 11, 2001 that so directly affected tourism at the time. Still, given its high economic development, social stability and fiscal room to increase borrowing, the country is well positioned to manage the crisis without permanently weakening its creditworthiness."
In the short term The Bahamas’ economic recovery will depend heavily on economic developments in the US, but raising long-term growth rates requires a reversal of the weak performance of the tourist sector and strengthening the regulation of the financial sector, the report noted.
Tourist arrivals have been falling since 2005, predating the current crisis.
In 2008, total arrivals were the lowest in a decade and data for the first half of 2009 indicates that this year will be worse.
The report also notes that the current account deficit fluctuates between 5 per cent of GDP to 20 per cent of GDP.
"This year, the current account deficit will be around 10 per cent of GDP, below the 13 per cent and 18 per cent posted in 2008 and 2007 respectively. On nominal terms, the current account deficit will shrink to an estimated $0.8 billion from $1.2 billion in 2008 and $1.3 billion in 2007," the report said.
"The decline in tourism receipts will be more than compensated by a decline in imports growth, a reflection of lower domestic growth and lower oil imports."
Last year oil imports amounted to close to 30 per cent of GDP – more than three times the 2004 levels.
Meantime, Moody’s ranked The Bahamas institutional strength as high, compared to other rated countries. Institutional strength seeks to measure a country’s ability and willingness to pursue and implement policies that support full and timely debt payment.
Total expenditures averaged 21.6 per cent of GDP in the last four years, compared to 18.5 per cent in the previous four.
"The 2009/2010 budget forecasts a 3.9 per cent of GDP deficit, but a higher shortfall is likely, given the severity of the crisis. Government borrowing is pushing debt higher and by 2010 it will be closer to 50 per cent of GDP, among the highest in the A category, but excluding debt held by the social security system reduces the debt burden by about 8 per cent of GDP," the report said.
"The government has announced its intention of reducing debt as soon as the crisis is over and given The Bahamas’ strong institutional history, we believe that is likely. Failure to do so would likely result in a negative rating action."
However, the report said despite the widening deficit, the government should face no problem covering its financing needs.
The Bahamas’ A3 foreign and local currency ratings are supported by the country’s economic development, resulting in one of the region’s highest levels of GDP per capita.
Moody’s considers The Bahamas’ economic strength as moderate, compared to other rated sovereigns.
The report said that The Bahamas further benefits from low external debt and has one of the lowest external vulnerability indicators of countries in its rating category based on Moody’s index measuring a nation’s exposure to external financial shocks.
The ratings are limited by the country’s narrow economic base, fiscal inflexibility and comparatively high government debt and vulnerability to external shocks, resulting in a moderate level of government financial strength.
The Moody report said the outlook remains stable, based on "our expectation that The Bahamas will be able to manage the current crisis without a major long-term impact on its main credit metrics."
