Bahamas confident of fiscal plan despite downgrade by Moody’s
The US-based rating agency, Moody’s has downgraded the Bahamas sovereign creditworthiness over fears its access to borrowing is being squeezed, but government is expressing confidence in its debt management plan and ultimately predicting a return to more favourable ratings.
The Ministry of Finance in a statement issued on Thursday night, said that the latest downgrade was motivated by concerns that are not warranted, noting that the government’s borrowing plan for the 2022-2023 fiscal year, clearly stated that it is aimed at avoiding the global bond markets over the next nine months due to the adverse high interest environment it would face.
“Their concern at the moment is that elevated external borrowing costs, if experienced over an extended period of time, could lead to more limited financing options thus increasing government liquidity risk,” the Ministry of Finance said.
“The plan has identified the local market and multi-laterals as major sources of financing during this period”, the ministry said, adding “multi-lateral support via guarantees and other credit enhancement will be used to attract other private financing and the ministry has already seen significant appetite for such structures.
“This, in combination with lower gross financing needs, has eliminated the need to go to the bond market in the near to medium-term.”
Mood’s slashed the Bahamas’ long-term issuer and senior unsecured ratings to ‘B1’ from ‘Ba3’, cited the “higher degree of government liquidity risk” as the main justification for its actions.
It said this stems directly from the elevated borrowing costs that the country would have to pay to access bond financing on the international capital markets given the perceive greater risk in lending to the Bahamas.
Moody’s said that the ability of Bahamian investors to meet the government’s financing needs is “limited” despite there being an estimated US$2.3 billion in surplus liquidity in the commercial banking sector.
“The key driver of the downgrade is Moody’s assessment that tighter financing conditions over the past year indicate more constrained financing options compared to prevailing conditions at the time of the downgrade to ‘Ba3’ in September 2021,” it said.
“Tighter financial conditions come amid still elevated, albeit declining, gross borrowing requirements, which Moody’s estimates at around 20 per cent of GDP when including Treasury bills. A narrowing fiscal deficit, which Moody’s expects to turn to a surplus by the fiscal year ending June 30, 2025, will reduce gross financing requirements.
“The Government plans to rely more heavily on domestic financing and greater utilisation of multilateral funding, including guarantees and other credit enhancements to mobilise private financing. If successful, this would reduce the need to rely on international bond issuances. However, the timing and the amount raised through these transactions is uncertain,” Moody’s said.
It said that the domestic market provides a relatively stable source of financing at affordable rates and with varying tenors. Recent Treasury bill auctions have shown strong demand from the banking sector for government securities, and Moody’s expects domestic investors to continue to rollover domestic amortisation and finance a portion of the Government’s net financing needs.
“However, in Moody’s view, the capacity of the domestic market to meet larger financing needs, including upcoming external amortisations (repayments), is limited.”
In its statement, the Ministry of Finance said that “Moody’s acknowledges that the government is well-positioned to meet its obligations in the near to medium term but points to what they consider to be a more challenging period beginning in 2027.”
It said that the repayment profile outlined in its medium-term strategy “would show that this period is quite favourable as it was structured to pay our obligations down in a consistent manner, avoiding large swings in debt service from year to year.
“In addition as budgeted, assets continue to accumulate in the sinking funds established to service that debt and the budgeted amounts are now being supplemented by tax arrears collected.
“We believe that as we execute the strategy outlined in our fiscal strategy report and our borrowing plan, there will be improvements in debt affordability and fiscal consolidation which will put upward pressure on our ratings,” the Ministry of Finance added. (CMC)