As published on tribune242.com, Friday 17 April, 2020.
Standard & Poor’s (S&P) last night forecast that the Bahamian economy will shrink by an “unprecedented” 16 percent in 2020 as it further downgraded this nation’s sovereign creditworthiness.
The rating agency, following swiftly behind its Moody’s counterpart, cut The Bahamas’ sovereign rating from “BB+” to “BB” due to the severity of the economic contraction the COVID-19 pandemic will inflict on this nation.
Citing The Bahamas’ tourism dependency as a major factor behind its action, S&P forecast that Bahamian economic output or gross domestic product (GDP) will shrink by twice as much as the 8.3 percent and eight percent contractions previously forecast by the International Monetary Fund (IMF) and Moody’s, respectively.
“The tourism industry accounts for more than 40 percent of the Bahamian economy, with the majority of visitors arriving from North America,” S&P analysts, Jennifer Love and Julia Smith, wrote in their report.
“We expect the severe contraction in tourism because of the COVID-19 pandemic will lead to a significant and unprecedented contraction in GDP, which we forecast will fall by about 16 percent in 2020. As a result, we expect GDP per capita to shrink to just above US$27,800 this year.”
K Peter Turnquest, deputy prime minister, responded to S&P’s move by last night reiterating that numerous other countries are also being downgraded by the rating agencies due to the havoc COVID-19 is wreaking on their economies.
Describing The Bahamas’ latest downgrade as unfortunate but “not unexpected”, Mr Turnquest said S&P’s action was “not something in our control at the moment” with the government’s main priority continuing to be providing financial assistance to those in need to prevent a complete collapse in living standards and surge in poverty.
“It’s the same all across the world. Countries are being faced with the same challenges,” he told Tribune Business. “For tourism-dependent countries like ours the effects are a little more significant so it’s not unexpected to see some commentary from the agencies.
“We anticipate what we do from here will have a significant effect, positive or negative on the outlook going forward. Our focus at this time has to be providing the assistance to the Bahamian people that they need, and that is - and will continue to be - the focus.
“It’s [the S&P downgrade] noted, but it is not something in our control at the moment to correct. The good news is we have a positive track record over the last several years, and have demonstrated to the investing community that we live up to our commitment to transparency and accountability,” he added.
“That won’t change and, following the same commitment, hopefully we will see our rating stabilise once things to return to normal.”
Given that S&P is predicting double the economic contraction projected by the IMF and Moody’s, it is forecasting that Bahamian GDP will shrink by around $2bn or one-sixth in 2020.
The Bahamas, along with Belize, were the only two out of a group of 10 tourism-dependent countries in the Caribbean and Latin American region to have their ratings cut by S&P yesterday. The likes of Jamaica, Dominican Republic and Barbados saw a decline only in their outlooks, while Turks & Caicos was unchanged.
“The sudden stop in tourism will cause unprecedented declines in GDP, fiscal balances and foreign exchange inflows,” S&P added of the region.
“Although there is a high degree of uncertainty about the rate of spread and the peak of the coronavirus outbreak, our base case for tourism in the region in 2020 assumes a year-over-year decline of 60 percent to 70 percent from April to December compared to 2019, with the largest declines occurring in the second and third quarters.”
Turning to The Bahamas, S&P added that COVID-19 had worsened a situation where this nation’s fiscal and economic performance had already been rendered “vulnerable” by Hurricane Dorian. It predicted that while the economy will take one to two years to recover, the impact on The Bahamas’ debt and fiscal deficits will linger for much longer.
“The dramatic decline in tourism will have a major impact on the country’s economy and government finances, which were already vulnerable following Hurricane Dorian in fall 2019,” the rating agency added. “While we expect the effects of the pandemic on the economy and fiscal deficits will be limited to one to two years, the country’s debt burden will take longer to recover.
“While we forecast a rebound in tourism in 2021, in most cases we do not expect a full recovery until 2022-2023 at the earliest. We believe that the pace of recovery will depend on the timing of the outbreak peak in The Bahamas and key visitors’ countries, the nature and resiliency of the tourism sector and sectors that indirectly depend on tourism, and the Government’s policy response.”
S&P continued: “Although there is a high degree of uncertainty about the duration of the pandemic and the impact on consumers’ future travel decisions, our base case assumes the effects of COVID-19 will be temporary, and we expect a strong - although not full - economic recovery in The Bahamas in 2021.
“Although we believe it will take several years for nominal GDP to reach pre-pandemic levels, we expect the country will benefit from its strong marketing presence and easy access for visitors.”
However, noting that the Government had already projected a $1.5bn increase in the national debt over the next six years due to Hurricane Dorian’s impact, S&P said the loss of tourism-related revenues - combined with “elevated spending” - will produce large fiscal deficits over the next two budget years.
“We expect the change in the general government net debt will average 4.2 percent from 2020-2023, while the country’s net debt will rise to almost 68 percent of GDP by the end of 2020,” S&P said.
“We now expect interest payments will remain above 15 percent of government revenues for three or more years. We expect The Bahamas will finance its deficit via a combination of domestic and external borrowing.
“The increase in public sector external borrowing will spur an increase in The Bahamas’ external debt, which we expect to continue to make up about 30 percent of total government debt. We expect the external debt of the public and financial sectors, net of usable reserves and financial sector external assets, will be about 112 percent of current account receipts in 2020,” it added.
“We expect the country’s gross external financing needs will rise to 342 percent of current account receipts and usable reserves in 2020, from about 250 percent in 2019.”
Mr Turnquest, in the Government’s official response to S&P, said: “This is an unfortunate position we find ourselves in, but it is similar to virtually every other country in the world. Our focus is on containing the spread of the virus, mitigating the economic fall-out and planning for a strong recovery.
“There will be difficult decisions to make on the road ahead, and there are many reform efforts that need to be accelerated to ensure we have a realistic and sustainable response, but this administration is prepared to take those actions.
“We note the significance placed on the strength of our recovery for future assessments, and we feel confident in our track record. We have significantly strengthened our institutions over the past three years; we have demonstrated steady leadership that knows how to support economic growth; and we have proven our ability to stabilise the country’s finances at sustainable levels.”