Bahamas receives 'BB-' long-term foreign-currency issuer rating from Fitch

Investing.com -- On Wednesday, Fitch Ratings assigned the Commonwealth of the Bahamas a long-term foreign-currency issuer default rating (IDR) of 'BB-'. The rating outlook remains stable.

The rating reflects the Bahamas' high GDP per capita and strong governance, demonstrated by recent progress on structural fiscal consolidation. However, these strengths are counterbalanced by low potential growth, heavy reliance on tourism, and exposure to climate-related shocks. The ratings are further constrained by high interest and debt burdens compared to peers, although these are improving due to ongoing fiscal consolidation efforts.

Government finances have improved significantly over the past few years, with the fiscal deficit declining to 1.3% of GDP in the fiscal year ended June 2024 from 3.7% in the previous fiscal year. The primary surplus reached 2.9% in the fiscal year 2023/24, the highest level in at least 25 years. This fiscal consolidation is a result of strong revenue growth, which increased to 20.7% of GDP in the fiscal year 2023/24 from 16.2% in the fiscal year 2017/18.

Fitch anticipates further revenue growth, including from the new global minimum tax of around 1% of GDP and further revenue mobilization. These factors are expected to improve the deficit to 0.5% in the fiscal year 2024/25 and a surplus of 1.2% in the fiscal year 2025/26.

Despite the fiscal consolidation, the debt-to-GDP ratio remains high at 81.5% in the fiscal year 2023/24, including guaranteed public sector debt. This is a significant decrease from its peak of 99.0% in the fiscal year 2019/20 but is still considerably above the 'BB'-median of 53.3% and the pre-Covid ratio of 65.0%. Fitch expects this to fall to 77.7% by the fiscal year 2025/26.

The Bahamas' economy is heavily dependent on the tourism industry, which benefits from the ability to diversify across the archipelago and the country's proximity to the U.S. Real GDP growth is estimated at 1.9% in 2024, down from 2.6% in 2023, reflecting the tapering off of the post-pandemic rebound.

As a small, tourism-dependent economy, the Bahamas is exposed to external shocks, including its dependence on imported goods, its exposure to the US economic cycle, and its presence within the hurricane belt. The government has implemented measures to mitigate these risks, such as insurance and contingency funds to address the impacts of a large hurricane.

The current account deficit (CAD) is high at 8.6% of GDP in 2024 compared to the 'BB'-median of 2.3%. However, rapid growth in tourism has bolstered services exports, offsetting the increase in goods imports. International reserves have been stable at USD2.6 billion or 3.8 months of current external payments in 2024.

Due to the fixed exchange rate, the Central Bank of the Bahamas (CBB) has limited monetary policy tools at its disposal. It primarily uses macroprudential rules and capital controls to manage monetary conditions.

The Bahamas' financial services industry serves as a second, albeit considerably smaller, pillar of the economy, accounting for around 9% of GDP. The offshore sector, which predominantly serves private wealth clients, benefits from its proximity to the US and the relatively large volume of expats who have a home on the islands. The domestic banking sector is stable and highly liquid.

The Bahamas has an ESG Relevance Score (RS) of '5' for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. This reflects its long track record of stable and peaceful political transitions, well established rights for participation in the political process, strong institutional capacity, effective rule of law and a low level of corruption.

Factors that could lead to a negative rating action include a renewed rise in debt and interest burdens, evidence of fiscal financing challenges, or an adverse tourism or weather shock that undermines foreign reserve levels and the external position. Conversely, factors that could lead to a positive rating action include strong fiscal consolidation that reduces debt and interest burdens, policies that allow for accumulation of substantial buffers against external shocks, or improved investment and growth prospects and evidence of greater economic diversification.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.