Moody’s plans return to pre-COVID tourism levels “only by 2024 at the earliest”
NASSAU, BAHAMAS – In the wake of Thursday’s general election, global rating agency Moody’s slashed the country’s credit rating yesterday.
The country’s sovereign ratings have been lowered to “Ba3” instead of “Ba2,” underscoring the daunting economic and fiscal realities facing the country and the new administration led by Davis.
Moody’s highlighted a significant erosion in the country’s economic and fiscal strength caused by the COVID-19 pandemic.
“The duration and severity of the coronavirus shock fundamentally weakened the Bahamas’ credit profile with lasting consequences in terms of higher debt burden and lower affordability of debt as well as reduced economic strength,” reads -on in the rating agency report.
“Real GDP contracted 14.5% in 2020, with the tourism industry hardest hit by a shutdown that lasted most of the year. Despite the surge in tourism activity in recent months, the Bahamas faces prospects of a slow economic recovery and remains vulnerable to potential future variants of the coronavirus. Moody’s expects stay-in tourist arrivals to return to 2019 levels only by 2024 at the earliest. “
Moody’s stressed that the country’s economic recovery is highly dependent on a rebound in tourism activity. The sector contributed 19% of GDP in 2019, and this contribution amounted to around 40% including related industries such as transportation and accommodation, and catering.
“The severity of the economic contraction has contributed to a significant increase in the Bahamas’ debt and interest charges, which are now significantly higher than those of their Ba-rated peers,” the degradation report said.
“The Bahamas’ debt burden was already higher than that of its Ba-rated peers before the pandemic, and will remain higher than its similarly-rated peers, as the economy is only slowly recovering from the pandemic. Fiscal consolidation brought about by the removal of COVID-related spending on unemployment benefits and other related items, as well as a recovery in revenue will support fiscal consolidation, which will gradually reduce the debt burden.
“The Bahamas’ debt burden will remain close to 80% of GDP by the end of fiscal year 2022/23 (fiscal year ending June 30, 2023), well above the median rated Ba3 (60%) . Additionally, the Bahamas’ narrow income base means that its debt as measured by debt-to-income ratio, which stood at 509% at the end of fiscal year 2020/21, will also remain significantly above the Ba-rated median of 266%.
The combination of a growing debt burden and declining income has contributed to a further deterioration in affordability of debt, with the interest-to-income ratio falling to 23% in FY 2020/21, compared to 16% during the 2019/20 financial year. Moody’s expects the interest-to-income ratio to peak in FY2021/22, but to remain above 20% over the next three years, and significantly higher than its rated peers.
Moody’s noted that the country’s captive domestic investor base and long maturity profile have provided a favorable debt structure despite recent increases. This has enabled the country to have a relatively solid institutional framework, a stable political system and a fiscal policy framework that is more responsive to economic shocks.
Moody’s noted that the Bahamas stands out from its similarly rated peers because of its comparatively high level of GDP per capita, which supports its debt capacity.
The report continues: “A slower pace of fiscal consolidation which contributes to tighter financing conditions and higher borrowing costs, which would call into question the government’s ability to finance budget deficits and the deadline. debt would probably lead to a further downgrade.
The rating agency said a hike was unlikely given the negative outlook, adding that implementing policies that support a process of fiscal consolidation to sustainably reduce public debt could likely result in a return to an outlook. stable.
He also highlighted improved debt accessibility by relying more on lower-cost official domestic and external sources of financing rather than more expensive issuance in the external market, as another route to greater stability.