Rating Action: Moody’s downgrades Sint Maarten to Ba2, changes outlook to negative, concluding review for downgradeGlobal Credit Research – 19 Mar 2021
New York, March 19, 2021 — Moody’s Investors Service, (“Moody’s”) has today downgraded the Government of Sint Maarten’s issuer ratings to Ba2 from Baa3. Moody’s also changed the outlook to negative. This concludes the review for downgrade that commenced on 10 February 2021.
The key drivers behind the rating action were:
• Policy differences with the Netherlands, the sole source of financing for Sint Maarten
• Untested access to alternative sources of financing, which exacerbates the credit impact of the large increase in Sint Maarten’s debt burden
The negative outlook reflects the risk that political differences with the Netherlands may lead to a repeat of the funding problems Sint Maarten faced at the end of last year.
The local currency ceiling is lowered to Baa2 from A3 and the foreign currency ceiling is lowered to Baa3 from Baa1. The three notch gap between the local currency ceiling and the sovereign rating reflects the limited role of the government in the economy. The one notch difference between the foreign and local current ceilings reflects the limited scope to impose transfer and convertibility controls within Sint Marteen’s existing monetary union.
RATIONALE FOR THE DOWNGRADE TO Ba2
POLICY DIFFERENCES WITH THE NETHERLANDS, THE SOLE SOURCE OF FINANCING FOR SINT MAARTEN
Sint Maarten, a constituent country of the Kingdom of the Netherlands, funds itself solely with the Dutch Treasury. Differences between the two nations on the implementation of certain policy measures led the government of the Netherlands to temporarily withhold liquidity support at the end of 2020, and a subsequent delay in debt payments by Sint Maarten.
Last December the government of Sint Maarten missed a NAF50 million maturity repayment on debt owed to the government of the Netherlands, a debt payment deadline that had been extended twice before. 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 funding crisis happened after the twin shocks of Hurricane Irma in 2017, and the 2020 covid pandemic, pushed Sint Maarten’s government debt to over 70% of GDP in 2020 from less than 30% of GDP prior to these events. Low cost financing from the Netherlands, which on lends to Sint Maarten at very low to concessional rate terms, has limited the debt’s rise impact on interest costs but Sint Maarten will continue to require substantial liquidity support. Moody’s estimates gross borrowing requirements equivalent to more than 11% of GDP in each of 2021 and 2022.
UNTESTED ACCESS TO ALTERNATIVE SOURCES OF FINANCING
The Netherland’s decision to delay liquidity disbursements highlighted Sint Maarten’s lack of independent access to the capital markets, a credit negative development as the country’s debt burden continues to rise. Faced with this lack of liquidity support the government of Sint Maarten did not have alternative sources of funding. Moody’s expects that Sint Maarten will continue to rely on funding from the Netherlands and remain subject to occasional liquidity constraints. And any future funding from market sources would imply higher interest costs, raising concerns about the government’s debt affordability.
In recent months the government of the Netherlands has requested several policy reforms including wage cuts to public sector employees as well as reforms to improve financial management and strengthen the rule of law. To assist in the implementation of these reforms, the government of the Netherlands seeks the creation of a Dutch-Caribbean oversight group called the Caribbean Entity for Reform and Development (COHO). COHO’s purpose is to review policy implementations by Sint Maarten, Curacao, and Aruba.
Moody’s expects that Sint Maarten’s process of developing own institutions and meeting requirements by the Netherlands will be a multi-year effort, and will be prone to occasional setbacks. Lack of progress in advancing these objectives may increase the risk that disagreements with the Netherlands lead to another liquidity crisis.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects the risk that the slow pace of policy reform, including delays in approving and implementing the COHO oversight office, will lead the Netherlands to once again limit liquidity support and a repeat of the funding problems Sint Maarten faced at the end of last year.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Moody’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 highly negative (CIS-4), reflecting a highly negative exposure to environmental risks, moderate exposure to social risks and a moderately negative governance profile, balancing development of its own institutions with institutional and economic support from the Netherlands.
Sint Maarten’s exposure to environmental risks is highly negative (E-4 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 moderately negative (G-3 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.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody’s could consider a stable outlook if Sint Maarten develops and implements a new, long-term credible funding process that eliminates 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.
Moody’s could consider a negative rating action if the likelihood of another liquidity crisis increases. Lack of a clear plan to address long term funding challenges, including changes to the current institutional arrangements governing debt management, could 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.
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: ba3
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 16 March 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 has become increasingly 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.
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At least one ESG consideration was material to the credit rating action(s) announced and described above.
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