Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697638958556.pdf (Bahamas)
Rating Action: Moody's confirms the Bahamas' Baa3 ratings and changes outlook to negative, concluding review for downgrade Global Credit Research - 25 Aug 2017 New York, August 25, 2017 -- Moody's Investors Service has today confirmed the Baa3 bond and issuer ratings of the government of the Bahamas and changed the outlook to negative.

The rating actions conclude a review for downgrade that commenced on July 6, 2017.
Moody's confirmation of the Baa3 rating is driven by the following drivers: 1) Prospects for debt stabilization supported by the government's fiscal consolidation program 2) The Bahamas' credit metrics remain in line with Baa3 peers, with GDP revisions supporting an improvement in quantitative metrics 3) Despite higher government borrowing needs, government liquidity risk remains contained.
The negative outlook reflects potential downside risks to the fiscal consolidation process posed by weaker- than-expected growth, exposure to climate-related shocks in the form of hurricanes, and implementation risks associated with measures to rein in expenditure growth and enhance revenues.

Absent successful fiscal consolidation, the Bahamas' fiscal and credit profile would likely weaken.
In addition, the sovereign is exposed to contingent liabilities stemming from state-owned enterprises and the Bank of the Bahamas, which would lead to a further deterioration of the government's fiscal strength should these materialize on its balance sheet.

The Bahamas' long-term foreign-currency bond ceiling remains unchanged at Baa1 and long-term foreign- currency deposit ceiling at Baa3.
The short-term foreign-currency bond ceiling remains Prime-2, whereas the short-term foreign-currency deposit ceiling is at Prime-3.

The Bahamas' long-term local currency country risk ceilings remain at A2.

RATINGS RATIONALE RATIONALE FOR CONFIRMATION OF Baa3 RATING FIRST DRIVER -- PROSPECTS FOR DEBT STABILIZATION SUPPORTED BY FISCAL CONSOLIDATION PROGRAM Moody's review for downgrade was prompted by a significant deterioration in the Bahamas' fiscal position that was revealed earlier this year.
During the review, Moody's focused on the prospects for fiscal consolidation and debt stabilization such that would keep the Bahamas' fiscal strength and credit profile consistent with its Baa3 rating.

In Moody's opinion, the Free National Movement (FNM) government's fiscal consolidation program, if successfully implemented, could stabilize government debt metrics.

The government has announced a series of measures to rein in expenditure and enhance revenues.
The authorities are targeting a 10% cut in current spending in addition to a hiring freeze.

On the revenue front, the government has taken steps to strengthen tax enforcement, particularly in property tax collections where evasion is relatively high, as well as reinforcing customs revenue administration to raise additional income.

The authorities anticipate a substantial reduction in the deficit this year, compared to the deficit for FY 2016/17, which Moody's estimates was around 7% of GDP.
Last year's deficit was elevated due in good part to one-offs related to reconstruction costs after hurricane Matthew and election-related spending.

For the current fiscal year, official projections place the deficit closer to 2% of GDP.

Even though Moody's anticipates a more gradual deficit reduction, our projections indicate the deficit could be consistent with values we estimate would stem the upward trend in debt ratios during previous years.
Moody's expects that the introduction of a fiscal rule that sets limits to fiscal deficits, transfers to state-owned enterprises, and budgetary resources allocated to salary and benefits would allow the authorities to contain the rise in government spending over the medium term, as long as there is strict compliance with this rule.
SECOND DRIVER -- THE BAHAMAS CREDIT PROFILE IN LINE WITH Baa3 RATING, REVISED GDP NUMBERS TO SUPPORT AN IMPROVEMENT IN QUANTITATIVE CREDIT METRICS Moody's review concluded that despite the recent deterioration in fiscal metrics, its assessment of the Bahamas' overall credit profile, which incorporates economic, fiscal and institutional strength as well as susceptibility to event risk, is that it remains consistent with its Baa3 rating.
Moody's expects that the ongoing review of the national accounts and work on the accompanying supply and use tables will likely result in upward revision of gross domestic product (GDP) figures for the Bahamas, as usually happens in this kind of exercise, as GDP statistics will better capture domestic consumption using value added tax information as a new data input.

Higher GDP would translate into higher per capita income levels, a consideration in our assessment of economic strength.
The Bahamas' income levels, using the GDP per capita by purchasing power parity (PPP) measure, are already higher than those of many similarly rated peers.

An upward adjustment in GDP per capita PPP would further increase the distance between the Bahamas' level and that of the median for its sovereigns at its rating level.

Upward revisions in GDP would also lead to an improvement on a broad set of credit metrics that are used by Moody's to determine a sovereign's relative credit standing.
For instance, the Bahamas' fiscal ratios are weaker than those of many similarly rated peers.

A higher GDP figure would lower debt/GDP and interest/GDP ratios, aligning the Bahamas' government debt metrics with those other Baa3-rated peers, e.g., Hungary, Slovenia.
THIRD DRIVER -- GOVERNMENT LIQUIDITY RISK REMAINS CONTAINED Despite large government deficits in previous years that increased the government's gross annual borrowing needs, liquidity risks remain low on account of a favorable debt profile and a relatively captive domestic investor base.

As of March 2017, domestic debt accounted for 73% of total government debt with commercial banks holding 40% of the domestic debt and the Central Bank and other public corporations 28%.
The overall maturity profile is favorable.

Short-term domestic debt represents only 12% of total debt.

External market debt -- four global bonds -- has an average maturity of 12 years, while domestic bonds have average maturities of 8.4 years.

The Bahamas debt profile incorporates relatively low refinancing risks given the dominant share of local creditors and the presence of capital controls, conditions that allow the government to enjoy access to a deep pool of domestic savings.
The Bahamas' average annual gross borrowing requirements were previously in line with the median of the Baa category but an unusually large deficit in fiscal year 2016/17 caused government financing needs to exceed historical trend levels of some 6-7% of GDP.

We expect annual financing needs to decrease to some 4% of GDP in the coming years, if government efforts prove successful in reducing the fiscal deficit.
RATIONALE FOR THE NEGATIVE OUTLOOK The negative outlook reflects that the government's fiscal consolidation efforts are subject to implementation risks as the authorities move to rein in expenditure growth and take steps to enhance revenues.

Compliance with the proposed fiscal rule, which is expected to be introduced over the coming year, will necessitate a sustained commitment to implement fiscal consolidation measures.
In addition, government debt metrics will stabilize only if implemented measures are effective in increasing revenues and decreasing expenditure growth over the near and medium term.

The outlook also contemplates that the fiscal performance could be adversely affected if the economic recovery anticipated in the government's macroeconomic scenario turns out be weaker than expected.

The Bahamas economy has performed poorly over the past five years.
The opening of Baha Mar and other tourism-related projects will likely support higher growth over the coming years.

However, if the economy underperforms relative to official expectations, this would likely weigh on fiscal deficit outcomes and, consequently, prospects for the stabilization of government debt ratios.

During the next 12-18 months, Moody's will monitor economic performance and its effects on fiscal consolidation prospects, and the government's response to potential shocks.
Additionally, the negative outlook captures potential contingent liability risks associated with government- owned entities, like Bank of the Bahamas (BoB), which could materialize onto the government's balance sheet.

In the case of BoB, where the government is the largest shareholder, the possibility that yet another recapitalization process may be required cannot be ruled out.
Were this to materialize, the associated fiscal costs could undermine sovereign creditworthiness if the magnitude of the support were to be material.

WHAT COULD CHANGE THE RATING - DOWN Moody's would downgrade the rating if over the next 12-18 months we observe that fiscal consolidation efforts are unlikely to reduce deficits to levels that would reverse the trend of rising debt ratios and lead to a stabilization of government debt metrics.
Downward ratings pressure would also emerge if economic growth were to underperform relative to government expectations, negatively impacting revenues and overall fiscal metrics.

We would also consider a downgrade if contingent liabilities stemming from Bank of the Bahamas -- or other SOEs -- materialize onto the sovereign's balance sheet, leading to a material worsening of government debt metrics.
WHAT COULD CHANGE THE RATING - UP Moody's would return the negative outlook to stable should the government's efforts to reduce the fiscal deficit lead to the reversal of the debt trend such that the Bahamas' fiscal strength and policy effectiveness would be consistent with a Baa3 rating.
Evidence that measures implemented to rein in expenditures and enhance fiscal policy controls will remain in place over the coming years, ensuring greater fiscal discipline and providing the government with more fiscal space to face shocks, would also support the stabilization of the outlook.
GDP per capita (PPP basis, US$): 24,555 (2016 Actual) (also known as Per Capita Income) Real GDP growth (% change): -0.3% (2016 Actual) (also known as GDP Growth) Inflation Rate (CPI, % change Dec/Dec): 0.4% (2016 Actual) Gen. Gov.
Financial Balance/GDP: -3.5% (2015/16 Actual) (also known as Fiscal Balance) Current Account Balance/GDP: -12.5% (2016 Actual) (also known as External Balance) Level of economic development: Low level of economic resilience Default history: No default events (on bonds or loans) have been recorded since 1983.

On 24 August 2017, a rating committee was called to discuss the rating of the Bahamas, Government of.
The main points raised during the discussion were: The issuer's fiscal or financial strength, including its debt profile, has materially decreased.

The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016.

Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
REGULATORY DISCLOSURES For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices.
For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating.
For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity.
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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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Renzo Merino Asst Vice President - Analyst Sovereign Risk Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A.
JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Atsi Sheth MD - Sovereign Risk Sovereign Risk Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A.

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