Rating Action: Moody’s places Sint Maarten’s Baa3 ratings on review for downgradeGlobal Credit Research – 10 Feb 2021New York, February 10, 2021 — Moody’s Investors Service, (“Moody’s”) has today placed the Government of St. Maarten’s Baa3 issuer ratings on review for downgrade.The key driver for the review for downgrade is the decision by the Netherlands, the sole funding source for Sint Maarten’s government, to withhold certain liquidity payments which in turn resulted in payment delays on bilateral loans owed to the Dutch Treasury. The Netherland’s decision to temporarily deny liquidity support resulted from an ongoing political disagreement between the two governments on the pace of domestic policy reform in Sint Maarten. The delays in providing liquidity support also highlighted Sint Maarten’s limited funding options and amplified the challenges posed by Sint Maarten’s growing funding requirements.The review will allow Moody’s to assess the impact of reduced timely fiscal support from the Netherlands in the face of a rising debt burden. Moody’s will also review the strength and development of Sint Maarten’s institutions, a key and ongoing challenge for the island nation since the dissolution of the Netherlands Antilles in 2010. The review may result in a repositioning of the rating to incorporate Sint Maarten’s growing funding needs and high dependence on a single source of financing.The local and foreign currency country ceilings remain at A3 and Baa1, respectively. The local currency ceiling is set at three notches higher than the sovereign rating, reflecting the limited role of the government in the economy and general economic and financial support from the Netherland’s which assists economic growth. The one notch difference between the foreign and the local currency ceiling reflects the country’s monetary union which limits the risk of foreign exchange controls.RATINGS RATIONALE/ FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSRATIONALE FOR INITIATING A REVIEW FOR DOWNGRADE ON SINT MAARTEN’S Baa3 RATINGSSint Maarten, a constituent country of the Kingdom of the Netherlands, funds itself solely with the Dutch Treasury and has not demonstrated independent market access. This results in very low borrowing costs for Sint Maarten but also requires continued political support from the Netherlands. Last year differences between the two nations, including lack of agreement on the speed of implementation of certain cost reduction measures, led to the government of the Netherlands to temporarily withhold liquidity support and a delay in debt payments by Sint Maarten.On 18 December 2020, the government of Sint Maarten missed a NAF50 million maturity repayment on debt owed to the government of the Netherlands. The maturity of the debt had previously been extended twice, originally on 21 October and then again on 16 November, as negotiations for a new tranche of liquidity support from the Netherlands failed to reach a conclusion. The delays were the result of lack of progress on several policy reforms requested by the Netherlands including compensation cuts for public employees in Sint Maarten.The conditional access to funding has exacerbated rising fiscal pressures as Sint Maarten’s government debt is projected to reach over 70% of GDP in 2021 compared to 26% in 2016. The increase is the result of dealing with large shocks in recent years, Hurricane Irma in 2017 and the worldwide pandemic in 2020. Concessional lending terms, including no interest loans, have limited the rise in interest payments which Moody’s estimates will end at 3.7% of revenues this year, lower than the 5% for Baa3-rated peers and only slightly higher than the 3.2% average of the prior five years.The review will allow Moody’s to assess the impact of reduced timely fiscal support from the Netherlands in the face of a rising debt burden. During the review, Moody’s will also assess the ability and willingness of the respective governments to reach long-term funding solutions for Sint Maarten, including the need for Sint Maarten to prioritize proposed policy reforms. The review will also evaluate Sint Maarten’s debt sustainability prospects and the institutional arrangements in place to make timely debt payments.ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONSMoody’s takes account of the impact of environmental (E), social (S) and governance (G) factors when assessing sovereign issuers’ economic, institutional and fiscal strength and their susceptibility to event risk. In the case of Sint Maarten the materiality of ESG to the credit profile is as follows:Sint Maarten’s ESG Credit Impact Score is moderately negative (CIS-3), reflecting moderate exposure to environmental risks, moderate exposure to social risks and a strong governance profile, reflecting institutional and economic support from the Netherlands.Sint Maarten’s exposure to environmental risks is moderately negative (E-3 issuer profile score). The island is still recovering from the damage caused by Hurricanes Irma and Maria in 2017. Sint Maarten is a small island economy that is exposed to these types of climate events, particularly because the economy is heavily dependent on tourism.Exposure to social risks is moderately negative (S-3 issuer profile score), reflecting social demands on housing, jobs and basic services exacerbated by the physical and economic impact of regular weather shocks.Sint Maarten’s exposure to governance risks is neutral to low (G-2 issuer profile) and balances the challenges the government faces as it continues to build domestic institutions since becoming a constituent country of the Kingdom of the Netherlands in 2010 with continued economic, logistical, and institutional support from the government of the Netherlands.Moody’s would likely downgrade the rating if following the review, the agency concluded that Sint Maarten’s government liquidity risks would remain high and that liquidity support from the Netherlands will continue to be tethered to political negotiations between the two nations. Lack of a clear plan to address long term funding challenges, including changes to the current institutional arrangements governing debt management, would contribute to this rating outcome. Expectations of continued political confrontations with the Netherlands that raised the risk of a repeat of the recent funding problems would also negatively affect the rating.Moody’s would likely confirm the rating if the review were to conclude that Sint Maarten was likely to agree to and implement a new, long-term credible funding process that would eliminate the risk of another funding crisis. Such a process would likely require acquiescence by the government of the Netherlands and a political agreement between the two nations.GDP per capita (PPP basis, US$): 39,507 (2019 Actual) (also known as Per Capita Income)Real GDP growth (% change): 8.2% (2019 Actual) (also known as GDP Growth)Inflation Rate (CPI, % change Dec/Dec): 0.4% (2019 Actual)Gen. Gov. Financial Balance/GDP: -1.8% (2019 Actual) (also known as Fiscal Balance)Current Account Balance/GDP: -14.1% (2019 Actual) (also known as External Balance)External debt/GDP: 40.9% (2019 Actual)Economic resiliency: ba2Default history: No default events (on bonds or loans) have been recorded since 1983.On 05 February 2021, a rating committee was called to discuss the rating of the St. Maarten, Government of. The main points raised during the discussion were: The issuer’s institutions and governance strength, have materially decreased. The issuer’s governance and/or management, have materially decreased. The issuer’s fiscal or financial strength, including its debt profile, has materially decreased. The issuer has become more susceptible to event risks.The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on http://www.moodys.com for a copy of this methodology.The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain 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 http://www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website http://www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, 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 issued the credit rating is available on http://www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on http://www.moodys.com.Please see http://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.
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