Cook Islands At Risk Of Downgrade

by Mary Swire, Tax-News.com, Hong Kong

09 September 2009

Standard and Poor’s (S&P) has revised its outlook from stable to negative, while confirming its 'BB’ long-term and 'B' short-term sovereign credit ratings for the Cook Islands.

The main reason for the change in outlook was said to be that Cook Islands’ net general government debt levels are projected to rise sharply in the next three years to about 28% of GDP. It is hoped that the debt increase would only be temporary, but the ratings agency has noted that Cook Islands’ rating was below the present level (at ‘BB-‘) when debt levels were last similar to the present.

As the lowest investment grade is ‘BBB-‘, Cook Islands debt is categorised as “sub investment grade”.

S&P noted that the increase is debt is largely on concessionary terms from regional development banks.

It is also related to necessary infrastructural improvements to transport facilities, aimed at helping the expansion of the tourist sector and, therefore, further economic development and increased employment possibilities.

As previously, ratings on the Cook Islands recognise the government's prior regular operating surpluses, the economic potential of tourism and the close relationship with New Zealand.

However, as the budgetary position is also therefore vulnerable to any further downturn in tourism, S&P has said that it would not want to see any further relaxation in the Cook Islands’ fiscal discipline leading to higher debt levels. There was the threat of the ratings being downgraded if the increase in debt proved to be more enduring.

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