Bahamas' rating outlook improved to positive by Moody's

Investing.com -- Moody's Ratings has revised the outlook on the Government of Bahamas' rating to positive from stable, while affirming the long-term issuer and senior unsecured ratings at B1. The backed foreign-currency senior unsecured rating was also affirmed at Aaa, solely based on the unconditional and irrevocable guarantee of scheduled principal and interest payments provided by the Inter-American Development Bank (IADB, Aaa stable).

The change in outlook to positive reflects the increased likelihood that fiscal consolidation will strengthen The Bahamas' credit profile over time. The government has already implemented significant fiscal adjustments, and their commitment to maintain large primary surpluses due to revenue-enhancing reforms increases confidence that debt will continue on a downward trend, projected to fall below 70% of GDP by 2028 from 76% in 2024. Lower borrowing requirements, driven by smaller net fiscal financing needs, would reduce government liquidity risk. The Bahamas' positive fiscal and liquidity developments are unlikely to be significantly impacted by a period of global financial markets volatility.

The affirmation of The Bahamas' B1 rating balances the high government debt burden and weak debt affordability against the country's strong institutional framework. This includes its fiscal policy framework that anchors expectations for a decline in the government debt burden. The country's comparatively high GDP per capita also bolsters its debt-carrying capacity. The rating is constrained by the country's vulnerability to external shocks, particularly from climate-related events and reliance on tourism.

The Bahamas' local- and foreign-currency ceilings remain unchanged at Baa3 and Ba1, respectively. The four-notch gap between the local currency ceiling and the sovereign rating reflects an established track record of predictable and reliable macroeconomic policymaking balanced against a reliance on tourism that represents a common risk for the government and non-government issuers in the country. The one-notch gap between the foreign currency and local currency ceiling reflects low transfer and convertibility risk, itself anchored by a history of relatively strong economic institutions supporting exchange rate stability and limited external indebtedness, despite a history of capital controls.

In the absence of future shocks, primary surpluses of this size would reduce the debt-to-GDP ratio to 76% at the end of fiscal 2025, and below 70% by 2028. The combination of higher revenue and a declining debt burden will improve The Bahamas' weak debt affordability gradually over time. We expect the interest-to-revenue ratio to improve to 19.4% in fiscal 2025, down from a peak of 22% in fiscal 2021. However, even with the improvement in The Bahamas' fiscal strength that we forecast, debt burden and debt affordability will remain weaker than similarly-rated peers.

The improvement in The Bahamas' fiscal position, if sustained, will lower gross financing needs and ease liquidity risk. As the government's net fiscal financing needs decline, the government will gain greater financing flexibility to refinance maturity debt.

The government is actively working to develop the domestic market to improve its ability to issue longer-term bonds and enhance the capacity of the market to finance the government. If successful, government efforts to improve the functioning of the domestic financial market, could lead to gradual shift toward longer-term domestic financing and improve the overall maturity profile of the domestic debt stock.

The Bahamas' B1 rating reflects the country's high government debt burden and weak debt affordability metrics, which limit fiscal policy space and the ability to respond to future shocks. Despite these challenges, The Bahamas benefits from a relatively strong institutional framework and a stable political system, which support effective policy implementation and investor confidence. Furthermore, the country benefits from very high national income level relative to peers, though the credit benefits are partly offset by the economy's small size, limited diversification, and vulnerability to external shocks, particularly climate-related shocks which affect the tourism sector. The tourism sector is highly reliant on US tourists, which exposes the sector to downturns in US travel.

The Bahamas' rating could be upgraded if the government continues to demonstrate a track record of fiscal consolidation, leading to a sustained reduction in government debt and improvement in debt affordability. Efforts to improve the maturity profile of government debt – through measures such as conducting buybacks and refinancing maturing debt with longer-term debt – would demonstrate the government's capacity to tap diverse external financing sources and would support the credit profile. Additionally, development of the domestic bond market, which allows issuance of longer-dated domestic debt without jeopardizing the expected improvement in debt affordability, would also support an upgrade.

The positive outlook signals that the rating is unlikely to be downgraded in the near term. The outlook could return to stable if The Bahamas experiences setbacks in the effectiveness of its fiscal consolidation, resulting in a lasting deterioration of the primary balance and an upward trend in government debt. Factors such as lower-than-expected revenue collection, increased spending, or failure to implement planned tax reforms could weaken fiscal strength and increase gross financing needs. Additionally, heightened vulnerability to external shocks, particularly from climate-related events, and reliance on commercial external financing with higher borrowing costs could exacerbate government liquidity risks.

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