Ministry of Finance on Moody’s Downgrade of Bahamas Outlook

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Sen. Michael Halkitis

Nassau, Bahamas – Ministry of Finance Statement on The Moody’s Investor Service Downgrade December 13, 2012:

In a rating action today, December 13, 2012, Moody’s Investor Service has downgraded the credit rating of the government of the Bahamas from A3 to Baa1.

As explained by Moody’s, key considerations of this rating action are:

  • Limited growth prospects following a protracted recession and weak recovery in tourism and construction
  • Significant and rapid deterioration of the government’s balance sheet, exacerbated by a low revenue base
  • High and rising levels of debt and a weakening of debt sustainability metrics relative to peers

As rationale for the rating, the report highlights:

The economy contracted at an average rate of 0.8% annually between 2007 and 2011 and Moody’s expects the post-crisis recovery to remain fragile.

The report reveals that as a result of expanding financing needs, the central government’s debt level rose to 53% of GDP in 2012 from 31.7% in 2007.

Tourism, offshore financial services, and construction sectors – the main drivers of economic activity – continue to face downside risks, exacerbated by an uncertain recovery in the US, the Bahamas’ main tourism market.

The downgrade incorporates a marked deterioration of the government’s financial balance over the past five years.

The state plays an increasingly dominant role in the economy through elevated levels of capital spending on public works projects (as a result of prior commitments), social safety net transfers, public sector employment, and increased budgetary support to public sector corporations.

This fiscal stimulus program is yet to yield growth dividends and unemployment remains close to 15%, depressing domestic demand.

The last point is especially telling in that despite the elevated levels of spending over the past five years and particularly the past two years, the benefits have been very narrowly distributed as evidenced by the persistently high level of unemployment.

The government of the Bahamas is committed to the stabilization and gradual reversal of these negative trends and to that end has developed a medium term strategy the aim of which is to reduce expenditure as a percentage of GDP, and increase revenue as a percentage of GDP.  We intend to achieve this through expenditure control, improved revenue administration and economic growth.

During the upcoming mid-year budget process the government will lay out a clear detailed action points to address the fiscal imbalance.

The ultimate objective of this strategy is to gradually move the debt to GDP ratio back toward acceptable levels and ultimately to achieve a primary budget surplus.