S&P said the government’s net debt is likely to rise sharply from 3 percent of gross domestic product in 2008 to around 28 percent in the next three years, but that this rise would only be temporary.
BB is categorized as “sub investment grade or junk.”
The ratings agency said the projected rise in debt levels to 28 percent of GDP is a level not seen since 2004 at which time the Cooks 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,” said S&P in a press release.
S&P noted that the government’s budget position was vulnerable to further weakening in the tourism sector, and said borrowings to help fund the South Pacific Mini Games may also pose a threat to the government’s position.
It said the increase in debt reflects the bringing forward of some port, water and road infrastructure projects to benefit from concessionary terms available from donor agencies.
S&P said the long term benefit of the new Telecom Sports Arena, funded by a concessional loan from the China Development Bank, is not likely to be as strong as the other infrastructure projects.
But S&P noted that it is a relatively small amount of debt at $13.5 million or 4.2 percent of GDP.
It said 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 credit analyst Kyran Curry said: “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 country’s ratings may be downgraded if the increase in debt proves to be more permanent.
