By NEIL HARTNELL
Tribune Business Editor
nhartnell@tribunemedia.net
The Bahamas was last night urged to "move more urgently to rev the engine" after Moody's again downgraded the country's sovereign creditworthiness over fears its access to borrowing is being squeezed.
The credit rating agency, in slashing 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. This, Moody's explained, stems directly from the elevated borrowing (interest) costs that The Bahamas would have to pay to access bond financing on the international capital markets given the perceive greater risk in lending to this nation.
The Ministry of Finance, responding to Moody's action, hinted that the latest downgrade was motivated by concerns that are not warranted. Referring to the Government's borrowing plan for the 2022-2023 fiscal year, it argued that the document clearly stated the Government is aiming to avoid 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 of Moody's, before pointing out that it plans to seek its deficit financing from domestic investors/lenders and multinational institutions such as the Inter-American Development Bank (IDB) which tend to offer cheaper credit facilities.
"The Government has laid out a clearly-articulated strategy in its annual borrowing plan to mitigate against the impact of the elevated external costs being seen now. The plan has identified the local market and multilaterals as major sources of financing during this period.
"Multilateral 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."
Moody's, though, argued that the ability of Bahamian investors to meet the Government's financing needs is "limited" despite there being some $2.3bn 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 percent 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 continued.
"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."
The timing of the Moody's downgrade, though, is especially unwelcome given that it coincides with an up to 163 percent increase in Bahamas Power & Light's (BPL) fuel charge that was announced this week while the European Union (EU) ratified its blacklisting of this nation for allegedly being 'uncooperative' on tax matters.
This latest action plunges The Bahamas further into non-investment grade or ‘junk’ status. The consequences of the latest downgrade include a further potential increase in the Government’s borrowing costs when it goes out to raise hundreds of millions of dollars in more debt financing later this year.
Investors will likely seek higher interest rates on Bahamian sovereign debt to compensate for the extra risk due to the Government’s loss of creditworthiness. This, in turn, will lead to higher debt servicing costs that will ultimately have to be paid by the Bahamian taxpayer.
Gowon Bowe, Fidelity Bank (Bahamas) chief executive, last night said the cut from 'Ba3' to 'B1' - the second consecutive year in which Moody's has lowered the country's creditworthiness - is "a fairly sizeable downgrade from where they moved from".
Arguing that The Bahamas must now focus on actions "to restore greater confidence going forward", rather than become fixated on the downgrade, Mr Bowe added: "They talked not about economic factors but more about liquidity in financing. It means the traditional means of raising debt is continuing to be tightened, and we can acknowledge that is true.
"It's not exhausted. It is tightening, and there are a number of world events we have to take into consideration." With the US and other major economies hiking interest rates to combat inflation, the Fidelity Bank (Bahamas) chief added: "If we consider market rates are going up, and credit spreads are going up, it's putting significant pressure on the cost of borrowing."
Hubert Edwards, the Organisation for Responsible Governance's (ORG) economic development committee head, told Tribune Business that The Bahamas could still get caught in a "vicious cycle" if the Government's plans to meet the bulk of its near-$2bn gross financing needs in the domestic market do not materialise.
"The fact we are being downgraded in the environment we are currently in, and facing the circumstances we are currently in, obviously means these things are going to get a bit more challenging for the country," he added. "The cost of debt increases on the back of a downgrade. It's going to get even harder to access borrowing.
"We are kind of creeping into an era where we must look to creative ways to raise funding. I believe that if the domestic market does not respond positively to the Government's efforts to raise more funds, the Government may be forced to start thinking about how to raise taxes to meet its obligations.
"While we would be having these discussions that raising taxes may be a last resort, this pronouncement on the downgrade from Moody's certainly moves us closer to that possibility. I don't know how close, but it's certainly moved us closer to that absolute last possibility, and is therefore something for us all to be concerned about."
Mr Edwards said Moody's downgrade also means The Bahamas needs to quicken the pace of outstanding economic reforms. "These pronouncements are a clear indication of the fact we need to more more aggressively to fix these issues plaguing the country," he told Tribune Business. "Those that are known, those that are long-standing, those that require urgent attention."
He listed energy reform, improvements to the ease of doing business, more efficient state-owned enterprises (SOEs) and a public sector that was more responsive and facilitative to the private sector's needs as priority areas. "Where the country is right now, the only viable answer to changing our trajectory is to secure faster economic growth," Mr Edwards said, otherwise The Bahamas will continue to "languish" when the world economy rebounds.
"The call to policymakers is to look seriously at reform and implement the changes to put us in a better position to rev the engine so we can create momentum and, at the appropriate time, move forward with greater speed. I think it's that important," Mr Edwards told this newspaper.