For the second time in little more than a year, Moody’s Investors Service has downgraded the rating for the Government of The Bahamas, this time because of a higher degree of government liquidity risk.

The long-term issuer and senior unsecured ratings has now fallen to B1 from Ba3. The outlook has been changed to stable from negative.

The downgrade comes as the rating agency considers an ongoing economic recovery, driven primarily by tourism activity, and a narrowing fiscal deficit.

But the country also faces constrained funding options, given elevated external borrowing costs. Tighter funding conditions over a prolonged period could undermine the country's ability to meet external repayments, including on its international bonds.

The agency is confident of the rating because of the high government debt burden and weak debt affordability metrics which limit fiscal policy space to respond to future shocks, “including climate shocks that will likely come with increasing frequency and intensity”.

The Moody’s report states: “The key driver of the downgrade is Moody's assessment that tighter financing conditions over the past year indicate more constrained financing options compared to prevailing conditions at the time of the downgrade to Ba3 in September 2021.

“Tighter financial conditions come amid still elevated, albeit declining, gross borrowing requirements, which Moody's estimates at around 20 per cent of GDP when including Treasury bills.

“A narrowing fiscal deficit, which Moody's expects to turn to a surplus by the fiscal year ending June 30, 2025, will reduce gross financing requirements.”

The government plans to rely more heavily on domestic financing and greater utilisation of multilateral funding, including guarantees and other credit enhancements to mobilise private financing.

But Moody’s remains unconvinced. In their view, the capacity of the domestic market to meet larger financing needs, including upcoming external amortisations, is limited.

The report said: “Moody's expects the government to maintain sufficiently broad access to funding to finance narrowing fiscal deficits and upcoming amortisations, including $300 million of international bonds due in 2024.

“However, the government will face a more challenging repayment period beginning in 2027, when it will need to make principal repayments on international debt of at least $250 million per year until the end of the decade.

“The government continues to accumulate assets in sinking funds that will be used for future repayments, and intends to deposit the collection of any tax arrears into the sinking funds for future debt repayment.

“However, amortisations related to international debt and along with other external payments which include loans due to multilateral lenders and commercial bank loans will necessitate the government maintaining access to sufficiently diverse external funding options.”

In June, Moody's affirmed the Government of Bermuda's long-term A2 issuer ratings and senior unsecured bond ratings and maintained the stable outlook.