S&P Global Ratings on Dec. 20 downgraded its sovereign ratings on the Bahamas by one notch, citing weaker-than-expected GDP growth and a slower pace of fiscal consolidation.
The rating agency lowered the country's foreign and local currency sovereign credit ratings to BB+/B from BBB-/A-3, with a stable outlook. It also cut the transfer and convertibility assessment for the Bahamas to BBB- from BBB.
S&P believes that lower GDP growth will lead to higher government debt than was initially expected, weakening the country's public finances.
Subdued activity during most of 2016, combined with economic disruption caused by Hurricane Matthew, will limit GDP growth in 2016 to around 0.3%, S&P said, adding that it expects the economy to grow 1.2% on average over the next three years.
"The erosion of the Bahamas' creditworthiness reflects these growing vulnerabilities within a context of a weak external position with growing levels of external debt, double-digit unemployment, high nonperforming loans in the banking system, and high household indebtedness," the rating agency noted.
External risks for the country will likely remain elevated as its extremely high liquidity needs, growing external debt, and large errors and omissions continue to act as a rating weakness.
The ratings on the Bahamas also reflect limited monetary and exchange rate flexibility as the Bahamian dollar is fixed at parity with the U.S. dollar. S&P anticipates that the central bank will continue to primarily rely on credit ceilings and capital controls to influence money supply.
The country's financial system as a whole remains well-capitalized, S&P said.
The stable outlook, meanwhile, is based on the expected opening of the Baha Mar resort in 2017, which should help sustain growth and stabilize the general government debt burden.
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.