Nassau, Bahamas — International ratings agency Standard & Poor’s (S&P) on Wednesday downgraded The Bahamas’ credit rating and placed the country’s economy on a negative outlook.
The action was taken due to the short-term “economic shock” brought on by megaresort Baha Mar’s bankruptcy filing and an increasingly “remote” chance of a quick settlement in the resort’s legal battles.
S&P dropped its foreign and local currency sovereign credit rating for The Bahamas, a measure of the strength and viability of the economy, from BBB/A-2 to BBB-/A-3, remaining just within the agency’s “investment-grade” category.
In a report issued on Wednesday evening, S&P said it believes the stalled opening of Baha Mar would depress economic growth by it failing to open for the high season in December.
The overall situation, S&P argued, was only worsened by long-term “growth bottlenecks” stifling an increasingly fragile domestic economy, such as stubborn unemployment figures and an “insufficient” energy sector.
“The short-term economic shock pertains to the Baha Mar bankruptcy filing and subsequent ongoing legal disputes,” S&P said.
“Since we placed our ratings on The Bahamas on CreditWatch, we believe that the chances the dispute will be settled quickly have become more remote.
“We do not believe that the parties involved – the developer, Baha Mar Ltd.; its main lender, the Export-Import Bank of China and the contractor, China Construction America – will manage to resolve their differences in time for the resort to open for the high season beginning in December.”
Baha Mar filed for Chapter 11 bankruptcy protection in Delaware on June 29.
However, Bahamian Supreme Court Justice Ian Winder denied Baha Mar Ltd’s application for recognition of US court proceedings.
The Bahamas government has filed a winding up petition to bring Baha Mar’s affairs under the control of Bahamian courts.
Winder will rule whether to accept or throw out the government’s request to appoint provisional liquidators under the petition on September 4.
In effect, the downgrade will increase the rate at which the government borrows money and will give the international business community more pause for thought before investing in the country.
S&P’s negative outlook means that there is a greater than one-in-three chance that the ratings agency will again lower The Bahamas’ ratings within six to 24 months.
A lower rating, the report noted, would largely be determined by whether the Baha Mar proceedings have “knock-on effects” on The Bahamas’ growth prospects, overall fiscal position, or external pressures.
“Not only do we see the completion of construction of this $3.5 billion mega-resort being delayed, but we also expect that bookings will take longer to fill the complex once it does open, given the reputational damage to the resort’s brand as well as the time needed to obtain new airlift capacity for the resort, among other issues,” S&P added.
Stabilization
However, the report noted that S&P could spare The Bahamas from yet another downgrade if the government takes prudent measures to offset the damage to the country’s growth projections caused by Baha Mar’s legal battles.
“We could also lower our ratings if the handling of the Baha Mar project, and its wider implications, leads us to reassess our view of The Bahamas’ institutional settings, which we currently view as a rating strength,” S&P said.
“On the other hand, the ratings could stabilize at the current levels if our concerns about this short-term shock do not materialize, or if the government takes measures to compensate for the economic damage it could inflict.”
On July 2, S&P placed The Bahamas’ ratings on CreditWatch Negative following Baha Mar’s bankruptcy filing in the U.S, leaving the agency with 90 days to revise or reinstate the former BBB/A-2 sovereign credit rating.
Long-term outlook
The combination of negative short and long-term outlooks placed The Bahamas on a low-growth trend, with S&P expecting real gross domestic product (GDP) per capita growth of less than one percent over the next several years.
“This is less than we forecast for its peers with similar levels of GDP per capita, and it follows negative real GDP per capita growth since 2008,” read the report.
According to the S&P report, the local economy’s long-term vulnerabilities stem from high household indebtedness, loan arrears, unemployment levels, and additional factors.
Additionally, the net external debt of the public and financial sectors has risen from 14 percent of current account receipts (CAR) in 2008 to an estimated 48 percent of CAR this year.
“The net external financing needs of the public and financial sectors rose from 141 percent of CAR to 159 percent during the same period,” the report said.
“These figures do not include the external debt and foreign direct investment in the island’s substantial tourism sector. In the domestic economy, non-performing loans are more than 15 percent of total loans.
“Consumer credit and outstanding residential mortgages are more than 60 percent of GDP.
“Unemployment – excluding seasonal effects – remains elevated. An inefficient energy sector pushes up energy costs and weighs on growth.”
Despite the downgrade and negative outlook, the report once again noted the impact of value-added tax (VAT) in curbing the country’s deficits.
S&P further predicted that VAT, along with efforts to modernize the country’s tax systems, could only contribute to a “deceleration” in the increase of government debt to just under three percent of The Bahamas’ GDP in 2015, from almost seven percent in 2014.
“Although this progress has contributed to our decision to keep the rating on The Bahamas in the investment-grade category, the fiscal reform measures will need to be accompanied by higher growth in order to stabilize the government’s debt burden,” S&P stated.