Published On:Thursday, March 18, 2010

By NEIL HARTNELL

Tribune Business Editor

A major Wall Street credit rating agency yesterday said it was prepared to give the Bahamas some breathing space, but wanted to see "definite indications" from the Ingraham administration in its 2010-2011 Budget as to how it planned to tackle this nation's spiralling fiscal deficit and debt-to-GDP ratios.

Gabriel Torres, Moody's Investors Service's senior sovereign credit rating analyst for the Bahamas, said this nation's relatively history of relatively prudent fiscal management had won it some time to tackle its public debt problems, with the rating agency "not yet" looking at following Standard & Poor's down the road of a sovereign downgrade despite the debt-to-GDP ratio increasing by 15 percentage points in the last three-four years.

Moody's, though, was "expecting to revisit the Bahamas in a couple of months' time to see what's going on", and Mr Torres told Tribune Business it would be difficult for this nation to "grow its way" out of its public finance problems, due to relatively low economic (GDP) growth rates over the past few years.

This, he implied, meant that the Government would either have to look at austerity measures, such as cuts in recurrent and capital expenditures, or new or increased taxes, to bring the Budget deficit and national debt back into line. Neither measure, or a combination of both, will be lightly felt, and some pain will probably be caused.

Although Moody's had noticed the Bahamas' national debt and key fiscal ratios were either rising or moving out of line last year, Mr Torres said the rating agency felt that as the global recession and financial crisis "calms down", the Government would move to set the public finances back on a sustainable path given this nation's history.

Emphasising that Moody's "did not want to overreact" to the Bahamas' current fiscal situation, Mr Torres explained: "Right now, we are waiting to give them [the Bahamas government] flexibility.

"They could, if push comes to shove, increase revenues. They have the flexibility. Right now, they're OK."

Moody's is projecting that the Bahamas' central government debt, as a percentage of GDP, will hit 47.7 per cent by the end of the current fiscal year, and 49.9 per cent of GDP by the end of the following period.

As a percentage of central government revenues, the Bahamas' national debt - now standing at over $3.9 billion - is projected to peak at 267.5 per cent this year, dropping to 248 per cent the following year. And, as a percentage of GDP, the Government's financial balance is forecast to bottom out at a negative 6 per cent in the current year, with a 5.4 per cent deficit projected for the 2010 Budget year.

Mr Torres said the Bahamas had seen "a spike in the fiscal deficit above the trend in the last couple of years", with the debt-to-GDP ratio growing by 15 percentage points "in the last three to four years".

He added that Moody's wanted to see the Government take steps to rein in the fiscal deficit, and was also waiting to see it take a policy decision that either determined to reduce the national debt and debt-to-GDP ratios to acceptable levels, or accepted the current ratios as "the new base levels".

Metrics

To get the debt metrics back on track, Mr Torres said the Bahamas had two options - either grow its way out by increasing GDP, thus bringing the ratios into line, or reduce the national debt through Budgetary measures.

"One of the problems the Bahamas has is that its growth has not been high in recent years," he added. "It's not easy to grow out of this problem."

Moody's, though, did not see the increase in foreign currency debt as a percentage of the Bahamas' overall national debt as a major concern, given the stability of this nation's one:one currency peg with the US dollar, and the absence of any "increased pressure" on it.

Yet when asked whether Moody's wanted to see the Government announce specific measures in its 2010-2011 Budget to tackle the deteriorating public finances, Mr Torres replied: "That is definitely what we're going to be looking for, very much so, making sure there is some indication from the Government that they need to be making some choices."