The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas has suffered “the largest relative increase in government debt levels” in the Caribbean over the past five years, with a Wall Street rating agency predicting central government debt will hit 60 per cent of GDP by 2015.

Moody’s, in its full country analysis on the Bahamas, said this nation’s central government debt (which excludes contingent liabilities) rose by a sum equivalent to 21.8 per cent of GDP between 2008 and 2012. Coming on top of a debt equivalent to 30.8 per cent of GDP pre-recession, this took the central government debt to 52.6 per cent this year.

While only Trinidad & Tobago and the Domincan Republic have lower debt-to-GDP ratios in the Caribbean, charts produced by Moody’s showed that the Bahamas came close to doubling its central government debt post-recession.

“The Government debt ratio has doubled over the past decade to nearly 54 per cent of GDP, and with government guaranteed debt this number becomes even higher,” Moody’s said.

“Debt accumulation has been driven by a deteriorating fiscal balance. Government deficits went to 6.3 per cent of GDP in 2012, from 1.6 per cent in 2008, and we expect large deficits to persist through 2015-2016....

“We project government debt to reach a historically high 60 per cent of GDP by 2015, up from 30 per cent in 2006, placing the Bahamas on par with peers with low government financial strength and above the median debt ratio for ‘Baa1’ rated peers.”

With government-guaranteed debt standing at around 7 per cent of GDP, the Bahamas’ total debt-to-GDP ratio stands currently at around 61 per cent, and - at least according to Moody’s - will hit 67 per cent by 2015.

Moody’s candidly asserted that the Christie administration had “yet to credibly commit to a fiscal consolidation plan”. And it noted that the large amount of tax incentives granted to the industry meant tourism - the Bahamas’ largest economic sector - only accounted for 11.2 per cent of total government revenues.

The Wall Street rating agency also zeroed in on the multi-million dollar “implicit subsidy” provided annually to the Bahamas Electricity Corporation (BEC), which was exempt from paying duties on its fuel imports.

And Moody’s also implicitly criticised the former Ingraham administration, saying its plan to stimulate the economy via infrastructure and capital works projects, while running larger fiscal deficits, contrasted with the approach taken by other ‘Baa1’ rated countries.

“The trend observed in the Bahamas’ fiscal balance has diverged from that observed in ‘Baa1’ peers starting since 2009, as the Government decided to run larger deficits to stimulate the economy, while peers saw an improvement in revenues and a retrenchment of stimulus spending,” Moody’s said.

It added that “two structural factors will continue to drive fiscal performance through 2015”, namely the Government’s narrow revenue base and increased public spending on infrastructure/capital works and social security.

Noting that revenues were typically less than 20 per cent of GDP, Moody’s said 50 per cent of them were derived from “volatile trade-related Customs duties”. It added that the gradual phasing out of tariff barriers, such as duties, as the Bahamas graduates to full World Trade Organisation (WTO) membership, meant this would be a further handicap in years to come.

Meanwhile, Moody’s said it expected the Government’s capital spending to “remain elevated” for two more years, as it completed infrastructure projects and initiated others to support tourism/hotel industry developments. Transfers and “increased budgetary support to public sector corporations” would also keep expenditure high.

“While the Government plans to gradually reduce capital spending starting next year, high expenditures on social transfers will be difficult to retrench as long as growth prospects remain subdued and unemployment high,” Moody’s said.

“Lastly, interest payments have ratcheted up to 2.5 per cent of GDP in 2012, from 1.6 per cent in 2006, reflecting rising debt servicing costs..... Government debt servicing costs are high, as interest payments account for over 14 per cent of government revenues, up from around 9.3 per cent in 2007.”

Moody’s added that the Government’s gross financing needs, or what it needs to borrow to cover the fiscal deficit and amortisation, rose to 7.7 per cent of GDP in 2011 - more than double the 3 per cent equivalent required in 2005.

The former figure was lower than the peak hit in 2009, when the Government was forced to borrow a sum equivalent to 9.4 per cent of GDP to cover its financing needs. It obtained most of its funds from long-term debt instruments issued locally to Bahamian investors, with the Government issuing securities equivalent in value to between 2.1 per cent and 3.8 per cent of GDP between 2009 and 2011.

On the positive side, some 78.9 per cent of the Government’s debt was denominated in Bahamian dollars as at end-June 2012. However, the amount of debt held by overseas investors had risen from 3.3 per cent in 2007 to 10.3 per cent now.

“Domestic debt rose by 10.2 per cent of GDP to 38.6 per cent, and government guaranteed debt rose to 7.1 per cent of GDP from 5.2 per cent over the same period,” Moody’s added.

While Bahamian commercial banks and the National Insurance Board (NIB) had taken up most of the Government’s commercial paper, Moody’s warned it could “face a decline in market appetite for long-term government securities in the future”.

While external borrowing had also risen, via the $300 million bond issue in 2009 and loans from the likes of the Caribbean Development Bank (CDB) and China Export-Import Bank, Moody’s said this - and ‘currency risk’ - remained relatively low.

It added that the Bahamas was expected to borrow around $80-$100 million total from the CDB and Chinese sources over the next few years.

Also working in the Bahamas’ favour, Moody’s said, was that the Government’s debt had an averagte maturity (the date when investors have to be repaid their principal) - of 15.6 years.

Only $128 million, or 4 per cent, of the Government’s total debt is set to mature within the next one-two years. Another $324 million, or 10.1 per cent, will mature within two-five years, and $613 million in principal - some 19.2 per cent of the total - will have to be returned to investors within five-10 years.

The bulk - some $2.129 billion or 66.7 per cent - is set to mature in more than 10 years.