Bangkok--13 Aug--Standard & Poor's
--We have revised the outlook on Cook Islands to negative.
--We have affirmed the ratings at 'BB/B'.
--Any further relaxation in the Cook Islands' fiscal discipline could lead to higher debt levels, given the government's fiscal profile is vulnerable to a further weakening in tourism.
Standard & Poor's Ratings Services said today that is has revised its outlook on the Cook Islands to negative, from stable, but affirmed its 'BB/B' foreign currency and local currency credit ratings on the sovereign. At the same time, the Transfer & Convertibility assessment on the Cook Islands was raised to 'AAA', from 'AA+'.
Sustained fiscal surpluses, debt restructurings and repayments, and the build-up of cash debt-repayment reserves have resulted in a lowering of general government net debt to 3% of GDP at June 30, 2008. The Cook Islands' net general government debt levels are projected to rise sharply in the next three years to about 28% of GDP — a level not seen since 2004, at which time the Cook Islands was rated lower, at 'BB-'. Nevertheless, the new debt is mostly concessionary and earmarked to address infrastructure shortcomings that impair investment in tourism and allied sectors, which are needed to diversify the economy and provide employment opportunities for the population.
We believe that the projected increase in debt will be temporary, and this supports the ratings. In part, it reflects the bringing forward of some port, water, and road infrastructure projects to benefit from concessionary terms available from donor agencies. Although the long-term benefit to the economy of the new stadium for the South Pacific Mini Games — funded by the China Development Bank — is not likely to be as strong as for other infrastructure projects, the quantum of the debt is relatively small, at NZ$13.5 million (or 4.2% of GDP).
"The negative outlook reflects higher projected government debt and the possibility of a further relaxation in fiscal discipline at a time when the government's fiscal profile is vulnerable to further weakening in the tourism sector," said Standard & Poor's credit analyst Kyran Curry. "Apart from the loans to fund infrastructure development, we believe the borrowings and use of debt repayment reserves to fund the hosting of the South Pacific Mini Games may illustrate a weakening commitment to fiscal consolidation and in upholding past reforms. While we consider that the currently projected debt levels can be accommodated at the 'BB' ratings level, there is a heightened risk that further borrowings or the use of reserves for recurrent expenditure or more "nation-building" projects such as the sports stadium could rapidly lead to a higher debt profile."
The ratings might be downgraded if the increase in debt proves to be more permanent. Further, the ratings could be reviewed if the current cyclical downturn in the operating position proves to be deeper and/or more permanent than currently expected. For the outlook to return to stable, we will need to be confident that the increase in debt is only temporary. The Cook Islands' small and narrowly-based economy makes any rating increase unlikely in the medium term.
The ratings on the Cook Islands reflect the government's fiscal profile, with regular operating surpluses; the favorable economic potential of tourism and allied industries; and a supportive relationship and monetary union with the highly rated sovereign of New Zealand. These factors are offset, in part, by a rising debt burden and potential for the past strong advances in government fiscal flexibility to be quickly reversed through undisciplined spending, and the vulnerabilities inherent in a geographically isolated economy. Infrastructure shortcomings also raise the costs and impair investment in the tourism sector, and in other sectors where prospects are already weak.
Complete ratings information is available to RatingsDirect subscribers at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com; select your preferred country or region, then Ratings in the left navigation bar, followed by Find a Rating.
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Media Contact:
David Wargin, New York (1) 212.438.1579, [email protected]
Analyst Contact:
Kyran Curry, Melbourne (61) 3-9631-2082
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