Hawaii’s tourism meltdown triggered by the COVID-19 pandemic has prompted two major credit-rating agencies to revise downward their debt outlook for the state to “negative” from “stable” as they monitor the local economy.
Despite the downgrades, Moody’s Investors Service and S&P Global Ratings maintained their strong long-term ratings on the state’s general obligation bonds.
Moody’s Investors Service affirmed its long-term Aa1 rating on the state’s bonds and said it reflects Hawaii’s positive long-term economic and revenue trends, the restoration and maintenance of sizable reserves, and proactive measures to improve the funding of its pension and other post-employment benefits liabilities.
S&P Global Ratings, meanwhile, affirmed its AA+ rating.
The agencies’ ratings, which reflect the state’s overall fiscal management, are a half-notch away from the highest level of AAA.
Both Moody’s and S&P expressed concern in recent reports about the effect the virus is having on the state’s No. 1 industry — tourism.
“We expect a sudden and severe decline in the state’s tax revenues as a result of the rapid downturn in visitor arrivals and the negative economic effects of the state’s own efforts to stem the outbreak,” Moody’s said in its report issued April 15. “We expect that the decline in fiscal 2020 and 2021 will be more severe than in other states and the recovery beyond fiscal 2021 will be slower due to the significance of the tourism industry in Hawaii and the industry’s dependence on air travel.”
Moody’s acknowledged that the state was in a good financial position before the virus struck.
“The state’s strong financial position and liquidity entering the crisis, as well as its strong fiscal governance, enhance its ability to enact spending cuts and other measures to offset the revenue loss, but the state will be challenged in these efforts by its high fixed costs for debt service, pensions and OPEB (other post-employment benefits).”
S&P said that although it views the state’s response to COVID-19 as “prudent,” it says that social risks posed by the virus to public health and safety likely will have a direct and material effect on the state’s economy and budget performance.
The agency, which released its report Monday, said its revised outlook reflects the state economy’s significant exposure to tourism. S&P said the virus and subsequent recession could result in fiscal and economic pressures.
“The rating on Hawaii reflects our long-cited view of the state being susceptible to exogenous shocks that have the potential to hurt its tourism sector, which accounts for 17% of state GDP (gross domestic product), along with elevated fixed costs as it continues to address its weak pension funding and large other postemployment benefits.”
S&P said the magnitude of the effects on Hawaii’s budget will depend on the severity and duration of the recession.
“Prolonged budgetary pressure from the pandemic and the current recession could limit the state’s flexibility in addressing the costs to contain the coronavirus and the potential loss in revenues through fiscal 2021,” S&P said.