TEXT-S&P revises Bahamas outlook to negative

Mon Sep 24, 2012 5:06pm EDT

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Overview
     -- Continued deterioration in The Bahamas' fiscal stance during the 
fiscal year ended June 2012 reflects cost overruns in capital expenditures as 
well as subdued revenue growth.
     -- We are revising our outlook on The Bahamas to negative from stable.
     -- We are affirming our 'BBB/A-2' sovereign credit ratings on The Bahamas.
     -- The negative outlook reflects the possibility of a downgrade if the 
recently elected Progressive Liberal Party government does not put forth a 
medium-term plan to address the higher deficits and to stem the rise in 
government debt to GDP.

Rating Action
On Sept. 24, 2012, Standard & Poor's Ratings Services revised the outlook on 
its long-term rating on The Commonwealth of The Bahamas to negative from 
stable. At the same time, we affirmed our 'BBB/A-2' sovereign credit ratings 
and 'BBB+' transfer and convertibility assessment on The Bahamas.

Rationale
The outlook revision reflects our view that the government's fiscal profile 
has continued to weaken. The government deficit, instead of peaking and 
starting to decline, rose even further in the fiscal year ended June 2012. 
Capital expenditure cost overruns (essentially on the New Providence roads 
project) and continued sluggish growth in recurrent revenue pushed the general 
government deficit to an estimated more than 7% of GDP. Standard & Poor's 
considers US$86 million in capital revenue as "below-the-line" deficit 
financing, in contrast with the government's budget documents. We expect a 
general government deficit of about 6.7% of GDP for the fiscal year ending 
June 2013. We don't expect the overruns associated with capital projects to 
moderate until the following fiscal year (ending June 2014), when the deficit 
could fall toward 4.4% of GDP. 

The May general election complicates efforts to lower the deficit more 
quickly--the new Progressive Liberal Party (PLP) administration took office 
toward the end of the fiscal year. The new government sees little room to make 
a larger near-term adjustment, beyond some expenditure and revenue 
efficiencies, and it wants to advance some of its own new programs. However, 
the administration has stated its commitment to reduce the deficit during its 
term in office. An important component appears to be a potential tax reform.

A long-standing constraint on The Bahamas' fiscal flexibility has been a 
comparatively low and narrow revenue base, at about 20% of GDP. The Bahamas 
has no personal income tax or value-added tax. Instead, taxes on international 
trade and transactions account for more than 50% of revenue. Enhancing that 
revenue base has been politically challenging and more recently limited by the 
timing of the general election. A reform to broaden The Bahamas' tax base 
would seemingly take several years to conceptualize, pass, and implement. In 
the interim, deficits are likely to remain at higher-than-anticipated levels, 
absent more significant expenditure adjustment or a boost to growth. 

We project net general government debt to rise from 36% of GDP in 2011 to 41% 
of GDP in 2012 and 45%-47% in 2013-2014. The interest burden has risen in 
recent years, to about 13% of general government revenues in 2012. However, 
about 80% of debt is issued locally and held by residents, which somewhat 
mitigates the debt and interest burden. Capital controls limit the ability of 
commercial banks (which are very liquid), public corporations, and pension 
funds to invest outside The Bahamas. The government's June bond issuance of 
Bahamian dollar (B$) 200 million, with tenors of five to 19 years at coupons 
of 4%-4.35%, was fully subscribed. 

The Bahamas' track record of political and macroeconomic stability that has 
delivered high per capita GDP, projected at almost $23,307 in 2012, supports 
our ratings. However, the country's significant dependence on tourism and the 
U.S. market is a vulnerability of the Bahamian economy. Tourism accounts for 
more than 50% of The Bahamas' GDP and employs more than 50% of the labor 
force, and U.S. tourists account for more than 80% of The Bahamas' total 
tourists. We expect growth of 2.5% in 2012 and 2013, up from 1.6% in 2011, as 
construction associated with tourism investment projects supports growth amid 
a continued slow recovery in tourism. 

The Bahamas' external financing gap is high, and we expect it to average 145% 
in 2012-2014. (The external financing gap is current account payments plus 
short-term debt according to remaining maturity relative to current account 
receipts and usable reserves.) Standard & Poor's believes that errors and 
omissions in the balance of payments most likely represent underreported 
foreign direct investment or tourism inflows and, thus, qualitatively diminish 
liquidity risks of the officially large external current account position. 
Importantly, the government's external amortization needs are low.

Outlook
The negative outlook reflects the increased likelihood of a downgrade if the 
new administration does not take action to reduce The Bahamas' fiscal deficit 
and arrest the increase in debt to GDP over the next several years. A 
weakening in our current assessment of The Bahamas' generally strong 
commitment to deliver sustainable public finances and economic growth could 
lead to a downgrade. Conversely, the ratings could stabilize at the current 
level if the government takes a more proactive policy response to reduce debt 
or if the Commonwealth's economic prospects strengthen.

Related Criteria And Research
     -- Sovereign Government Rating Methodology And Assumptions, June 30, 2011
     -- Methodology: Criteria For Determining Transfer And Convertibility 
Assessment, May 18, 2009

Ratings List

Ratings Affirmed; Outlook Action
                                          To                 From
Commonwealth of The Bahamas (The)
 Sovereign Credit Rating                  BBB/Negative/A-2   BBB/Stable/A-2

Ratings Affirmed

Commonwealth of The Bahamas (The)
 Transfer & Convertibility Assessment     BBB+               
 Senior Unsecured                         BBB                



Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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