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S&P Lowered Cook Islands Long-Term Rating To 'BB-' On Weakening Fiscal And Political Settings; Outlook Negative

December 21, 2010 Standard & Poor's
MELBOURNE (Standard & Poor's) Dec. 21, 2010 Standard & Poor's Ratings Services said today that it has lowered its long-term credit rating on the Cook Islands to 'BB-' from 'BB'. The short-term rating is affirmed at 'B' and the Transfer & Convertibility (T&C) assessment remains 'AAA'. There is no change to the existing negative outlook.

"The lowering of the ratings reflects the Cook Islands' weakening fiscal settings and the heightened potential for the previous strong advances in fiscal flexibility to be further unwound through undisciplined spending and debt accumulation," said credit analyst Kyran Curry, of the Sovereigns Ratings group. "The rating action is also influenced by heavy emigration, weakened capacity in the Ministry of Finance, and infrastructure shortcomings that raise costs and impair investment in the tourism and other sectors, where prospects are already weak."

Sharply higher government spending and a rising debt and interest burdens signal a significant departure from years of successful fiscal consolidation. The general government deficit is estimated at 6.5% in 2010, and is expected to average 7.4% over the next three years. This contrasts with surpluses averaging 2.2% over the past five years. Besides sizeable spending to close port, transport and water infrastructure gaps, the fiscal settings are pressured by a 7.1% contraction in GDP in the past two years, and a structural weakening in the revenue base associated with a falling population (down by 11% in 2010 and by an expected 3% over the next 3 years), and rising civil service salaries (68% of operating expenditure in 2010). The net general government debt is estimated to have risen to 19% of GDP in 2010 from a low of 5.7% in 2008, with further rises to about 37.6% by 2013. Given the concessional nature of the bulk of borrowings, the interest burden remains light (at 1.1% of revenues in 2010) but is expected to rise in line with higher borrowings. We note that some funds accumulated to meet repayment commitments for loans undertaken by government-related entities have been spent elsewhere, and that no further contributions to the reserve are planned despite rising borrowings.

These factors are offset, in part, by the economic potential of the tourism sector, and a supportive relationship and monetary union with the highly rated New Zealand (AA+/Negative/A-1+).

"The negative outlook reflects the possibility for a downgrade if the Cook Islands' fiscal settings do not improve over a sustained period under the newly elected government" said Mr. Curry. "Improved fiscal discipline, supported by the appointment of a competent and effective financial secretary, will be an important component of such an improvement."

"Apart from the loans to fund infrastructure development, the ratings could be lowered if new borrowings or the use of debt-repayment reserves to fund recurrent expenditure and "nation-building" projects such as sporting facilities adds to a higher debt profile. We believe this would illustrate a continued weakening commitment to fiscal consolidation and in upholding past reforms."
Company — Cook Islands
  • Full name
    Cook Islands
  • Registration country
    Cook Islands