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Moody's Downgrades Bahamas' Credit Rating

by Amanda Banks,, London

24 December 2012

Moody's, the international ratings agency, has downgraded the Bahamas' credit rating from A3 to Baa1 on account of the sustained economic contraction during 2007 to 2011 and concerns that the territory's key economic sectors, including the offshore financial services sector, will continue to experience weak growth.

Announcing its decision, Moody's highlighted that the Bahamas' economy has contracted by an average rate of 0.8% annually between 2007 and 2011, and central government debt as a percentage of gross domestic product (GDP) has risen from 31.7% to 53% in 2012. Room for corrective action is limited due to economic weakness and the low revenue base, it said.

The agency said that although the government has increased spending in an attempt to prop up the economy, these attempts have failed, and unemployment remains close to 15%, depressing domestic demand.

The Bahamas government says that it has developed a medium-term strategy to improve government spending efficiency, and plans to increase the territory's tax-to-GDP ratio, to tackle the deficit. In addition, the government is undertaking initiatives, in particular to support small- and medium-sized businesses, to foster stronger economic growth. Plans are to be announced in mid-2013 under the budget framework to tackle the deficit and bring about a fiscal surplus over the medium-term, while a White Paper on Tax Reform will lead to the first major public discourse on the topic and to significant changes in the tax system.

The decision by Moody's mirrors that of Standard and Poor's in November 2011, when the Ministry of Finance agreed that the territory was suffering as a result of the limited diversity of the economy. At the time it stated: "Given the Bahamas’ economic concentration on tourism and financial services for more than 50 years and given its limited growth prospects in the current challenging global economic environment, it seemed likely that a rating downgrade would follow."

TAGS: tax | investment | Bahamas | international financial centres (IFC) | budget | offshore | unemployment | services

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