Above: Nassau (CJ Photo)

By the Caribbean Journal staff

Moody’s Investors Service has downgraded the rating of the Bahamas’ government to “Baa1” from A3, the New York-based ratings firm announced Friday.

The government’s outlook remains negative.

Moody’s cited three major factors for the downgrade: limited growth prospects following a protracted recession and weak recovery in tourism and construction; “significant and rapid deterioration” of the government’s balance sheet, exacerbated by a low-revenue base; and high and rising levels of debt and a weakening of debt sustainability metrics relative to peers.

The Bahamian economy contracted at an average rate of 0.8 percent annually from 2007 to 2011, and Moody’s said it expected the country’s post-crisis recovery to “remain fragile.”

“Tourism, offshore financial services, and construction sectors — the main drivers of economic activity — continue to face downside risks, exacerbated by an uncertain recovery in the US, the Bahamas’ main tourism market,” the firm said in a statement.

Moody’s said the downgrade incorporated a “marked deterioration of the government’s financial balance over the past five years.”

While the Progressive Liberal Party government did not take over until May 2012, Moody’s said that expenditure growth “has continued following the election of a new government.”

“The state plays an increasingly dominant role in the economy through elevated levels of capital spending on public works projects, social safety net transfers, public sector employment and increased budgetary support to public sector corporations,” Moody’s said. “The fiscal stimulus programme is yet to yield growth dividends and unemployment remains close to 15 percent, depressing domestic demand.”

The firm said it found “limited prospects” for the fiscal consolidation necessary to strengthen the government’s balance sheet and stabilize debt levels,” Moody’s said.

While the government saw a one-time revenue windfall in divesting part of the Bahamas Telecommunications Company and and stamp duties on large tourism projects, these developments “will not be credit supportive going forward,” it said.

A failure to reduce rising debt and stabilize spending could change the rating downward, Moody’s said, as could a “crystallization of contingent liabilities from debt held by public sector corporations such as the loss-making Bahamas Electricity Corporation.”

On the other hand, revenue-side reforms could stabilize the ratings outlook, as could a number of new tourism developments over the next 12 to 24 months.