New York, December 14, 2012 — Moody’s Investors Service has downgraded the rating of the government of the Bahamas to Baa1 from A3. The rating outlook remains negative.

Key drivers of this rating action are:

1. Limited growth prospects following a protracted recession and weak recovery in tourism and construction
2. Significant and rapid deterioration of the government’s balance sheet, exacerbated by a low revenue base
3. High and rising levels of debt and a weakening of debt sustainability metrics relative to peers

RATING RATIONALE
The economy contracted at an average rate of 0.8% annually between 2007 and 2011 and Moody’s expect the 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 downgrade incorporates a marked deterioration of the government’s financial balance over the past five years. Expenditure growth has continued following the election of a new government in May 2012, and 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. This fiscal stimulus program is yet to yield growth dividends and unemployment remains close to 15%, depressing domestic demand.

We see limited prospects for the fiscal consolidation necessary strengthen the government’s balance sheet and stabilize debt levels. The Bahamas has a limited revenue base and the government relies disproportionately on volatile trade-related tax revenue and property taxes. A one-time revenue windfall from the divestment of the Bahamas Telecommunications Company eased financing needs in 2011 and stamp duties on several large tourism projects financed by foreign investment compensated for a decline in recurrent revenue in 2011, but these developments will not be credit supportive going forward.

We do not expect reforms necessary to increase recurrent revenues, most importantly the introduction of a value-added tax and a modernization of the property tax system, to materialize before 2014/15.

The government plans to gradually reduce capital spending starting in 2013, but increased current expenditure outlays on social transfers will be more difficult to retrench while growth prospects remain subdued.

As a result of expanding financing needs, the central government’s debt level rose to 53% of GDP in 2012 from 31.7% in 2007 and debt sustainability metrics have deteriorated relative to A-rated peers. The combination of historically high debt levels and large fiscal deficits has left the government with limited fiscal buffers to effect further stimulus or respond to external shocks.

WHAT COULD CHANGE THE RATING DOWN
We expect the government to find it difficult to rationalize spending and achieve the fiscal consolidation necessary to stabilize the debt and place it on a sustainable trajectory in the near term. While the pace of increase in government debt ratios is likely to slow in the coming years, a failure to reverse the recent trend of rising debt will place downward pressure on the Bahamas’ rating. In addition, the crystallization of contingent liabilities from debt held by public sector corporations such as the loss-making Bahamas Electricity Corporation could adversely affect the rating. A further deterioration of the public sector balance sheet due to external shocks in the form of weather-driven events like hurricanes will also be credit negative.

WHAT COULD CHANGE THE RATING UP
Revenue-side reforms will be a key ingredient to stabilizing the ratings outlook. Enhancements to public infrastructure, in combination with a number of new tourism developments expected to significantly expand capacity in next 12-24 months, will be credit positive if they translate into an improvement in the growth outlook. Finally, a continued recovery in the US will be critical to support the rating.

CEILINGS
As part of this rating action, Moody’s has made the following adjustments to ceilings for corporate and structured ratings, as well as offshore banks:

Foreign Currency Bond Ceiling — A2

Foreign Currency Deposit Ceiling — Baa1

Local Currency Country Risk Ceiling — A1

Offshore Banks – Foreign Currency Bond Ceiling — Aa3

Offshore Banks – Foreign Currency Deposit Ceiling — A2

The A1 local currency country risk ceiling reflects the maximum credit rating achievable in local currency for a debt issuer domiciled in the country. The foreign currency bond country ceiling of A2 and the Baa1 ceiling for foreign-currency bank deposits are lower than the local currency ceiling as they also capture foreign currency transfer and convertibility risks.

METHODOLOGY
The principal methodologies used in this rating were Sovereign Bond Ratings Methodology published in September 2008 and Local Currency Country Risk Ceiling for Bonds and Other Local Currency Obligations published in August 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued by one of Moody’s affiliates outside the EU are endorsed by Moody’s Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody’s Investors Service information.

Moody’s considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody’s adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody’s considers to be reliable including, when appropriate, independent third-party sources. However, Moody’s is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO’s major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody’s Corporation; however, Moody’s has not independently verified this matter.

Please see Moody’s Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody’s ratings were fully digitized and accurate data may not be available. Consequently, Moody’s provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Edward Al-Hussainy
Asst Vice President – Analyst
Sovereign Risk Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Bart Oosterveld
MD – Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653