Standard & Poor’s (S&P) Ratings Services announced today that it has revised its outlook on its long-term sovereign credit rating on **The Commonwealth of The Bahamas** to positive from stable. S&P also affirmed its ‘A-‘ long- and ‘A-2′ short-term sovereign credit ratings on The Bahamas.
Credit analyst Olga Kalinina points out that the ratings reflect The Bahamas’ macroeconomic stability, prudent fiscal policies, and steady monetary stance. *”The island’s currency peg to the U.S. dollar, in effect since 1973, ensures low inflation, while generally disciplined fiscal management has led to only moderate accumulation of government debt,”* said Mrs. Kalinina, adding *”The Bahamas’ political environment is stable, and its standard of living is high. Public sector external debt is low and declining, with net external assets at 8% of current account receipts in 2007.”*
The S&P Analyst said economic growth is expected to pick up and stabilise at about 4% in the next three to five years, reflecting massive investment projects in the tourism industry. Estimated at over US$10 billion, committed and already-started projects should provide positive externalities to a wider economy, supporting Standard & Poor’s expectation of improving sovereign creditworthiness. As such, the GDP per capita is expected to increase to roughly US$23,000 in 2010 from US$19,000 in 2006, while unemployment should decline to 6.8% in 2010 from 10% in 2005.
Similarly, the narrowing fiscal gaps, boosted by growing revenue and contained expenditure, are expected to lead to a gradual decline in general government debt to an estimated 35% of GDP in 2010 from 38% in 2006 (or 21% of GDP from 24% on a net basis). However, given the smallness and openness of the economy, these projections remain vulnerable to the worsening external environment and weather-related shocks. In this regard, the economic development in the U.S. and, in particular, its impact on the tourism trend is especially important.
Mrs. Kalinina said that the positive outlook reflects the expectation that ongoing, substantial foreign direct investment (FDI) will materially expand and upgrade the tourism sector, a main pillar of the Bahamian economy-bolstering activity across other economic sectors. As a result, in addition to ensuring higher growth in the coming years, the financial benefits of such expansion should translate into stronger fiscal and external positions over time.
*”While widening external current account deficits currently reflect high import requirements and temporarily dislocated tourism capacities, Standard & Poor’s believes that prudent monetary management and solid FDI inflows should support the relative stability of international reserves. Similarly, the commitment to a disciplined fiscal stance should mitigate possible capital spending pressures and ensure a gradual decline in debt ratios,”* noted Mrs. Kalinina. *”An upgrade will be considered as the first signs of a positive, sustainable trickle-down effect of these new investments emerge in the fiscal and external accounts. On the other hand, should such improvement be hindered either externally (e.g., weather-related or negative world tourism dynamics) or domestically (e.g., relaxation of the policy stance or a slower-than-expected pace of project implementation), the outlook will be revised back to stable,”* she concluded.