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$550m Deficit 'Not Set Off Big Alarm Bells Yet' On Wall Street

By NEIL HARTNELL

Tribune Business Editor

The Bahamas’ projected $550 million deficit for the 2012-2013 fiscal year has “not set off serious alarm bells yet” on Wall Street, Tribune Business can reveal, with no further downgrade to this nation’s sovereign credit rating likely in the short-term.

Analysts who cover the Bahamas for Moody’s and Standard & Poor’s (S&P), acknowledging that the ‘growth trajectory’ for the Bahamas’ $4.6 billion national debt was currently “not sustainable”, said they were both looking for the Government to produce a medium to long-term plan to direct its finances back on to a stable path.

Admitting to concerns about this nation’s “debt pile up” over the past five years, the direct debt-to-GDP ratio having increased by more than 20 percentage points over a five-year period to an estimated 50.6 per cent by end-June 2012, Edward Al-Hussainy, an analyst with Moody’s, said the projected fiscal deficits for 2011-2012 and 2012-2013 were higher than the rating agency had projected.

Yet, while Moody’s has the Bahamas’ sovereign credit rating on ‘negative’ outlook, Mr Al-Hussainy said no further downgrade to its existing ‘A3’ position was likely in the near term.

The Government “making spending commitments it can’t sustain over the medium term” would be a development to provoke further concern from Moody’s, he explained, but said it was currently “too early to tell” the Christie administration’s policy direction.

And Mr Al-Hussainy praised the Bahamas for faring better than other tourism-dependent Caribbean economies when it came to its fiscal position, adding that foreign direct investment (FDI) had also held up well in comparison to regional counterparts.

“It’s definitely a situation that we’re watching,” Mr Al-Hussainy told Tribune Business of the Bahamas’ ever-expanding fiscal deficit and national debt.

“We’ve had a negative outlook on the country for a while, and part of that reflects the level of concern with the debt. It’s basically doubled in six-seven years.

“It’s definitely an area of concern, but given the current situation the Bahamas is in, it’s not set off serious alarm bells yet. The Bahamas is able to fund itself at relatively decent rates, and growth is picking up, projected at 2.5-2.7 per cent for the next year. That bodes well for debt servicing.”

A February 2012 Moody’s ‘credit opinion’ on the Bahamas noted how the Government’s direct debt had increased by 135 per cent in a decade, although its ratio to GDP dropped slightly to 47.1 per cent in 2011, down from 48.3 per cent in 2010. Yet almost 50 per cent of the national debt increase had occurred “in the past three years”.

“The debt is not on a sustainable trajectory right now,” Mr Al-Hussainy conceded to Tribune Business. “But it’s an interplay between the growth rate, which has held up well compared to other countries in the region, and the fiscal deficit.

“We were expecting it to be high, but it’s [the fiscal deficit] slightly higher than we had projected. We were expecting it to go up. We’re definitely looking to see what the Budget projections are going to be for the next year or two. That’s going to be a key determinant of whether the debt is on a sustainable path.”

The Government is projecting GFS fiscal deficits of $504 million and $550 million for the years 2011-2012 and 2012-2013 respectively, meaning that over the next two years it will add more than $1 billion to its national debt.

Moody’s, somewhat optimistically, in its February 2012 note had projected that while the fiscal deficit “may creep back up somewhat in” 2011-2012, it was set to remain below the $363 million and $399 million incurred in 2008-2009 and 2009-2010. No chance.

And, the Wall Street rating agency noted, the deficit between July-November 2011 was “20 per cent smaller than the same period the previous year”.

Still, Mr Al-Hussainy said Moody’s was waiting to see “how things develop” in terms of GDP growth before it looked at taking any action on the Bahamas’ sovereign rating.

“Right now, the rating is A-3. That’s an investment grade rating, and we have it on negative outlook because we see downside risks at the moment,” he added. “We need to get a chance to have a conversation with the Minister of Finance to get a sense of where things are going for the next 12-24 months.”

The inference that the Government and Moody’s have yet to be in contact is interesting, given the Prime Minister’s previous assurance that his administration would reach out to the credit rating agency after it blasted its mortgage relief plan.

“If we see the Government making commitments to spending that they can’t sustain over the medium term, that’s when we’ll get worried,” Mr Al-Hussainy told Tribune Business. “Right now, it’s a little bit too early to say one way or another.

“There’s some degree of concern because the debt has piled up, but compared to countries in the region you’re doing OK..... Considering that in 2007 you [the direct debt-to-GDP] ratio were in the 30 per cents, that’s a significant escalation. We’ll definitely be looking for that to slow.”

Still, Mr Al-Hussainy indicated to this newspaper that Moody’s was prepared to effectively ‘cut the Bahamas some slack’ when it came to tackling its economic growth and unemployment problems, as a certain level of government spending would be needed to address these.

“The more immediate concern for the Government is unemployment, and that number [15.9 per cent] is the highest it’s been in the last 15 years or so,” he added.

“We expect some higher degree of spending top deal with some of those immediate issues, and for us that will not necessarily move the rating. The immediate focus has to be on unemployment, and I would expect some flexibility when it comes to spending.

“One of the positive things is that FDI has held up quite well, so the Bahamas has been able to fund its current account through FDI, which is positive, as it means it is not drawing down reserves.”

Mr Al-Hussainy also told Tribune Business he had been “encouraged” by Prime Minister Christie’s statements on tax reform and expanding the tax base.

“That’s a positive,” he added. “It’s early stages, but expanding the tax base is going to be very important. Tax revenues, as a percentage of GDP, are very low for an economy with this development. Expanding the tax base will be key, and there is space to catch up.”

Lisa Schineller, a Standard & Poor’s (S&P) analysts, told Tribune Business that the Government had been “left with a larger hole, fiscal deficit than expected” when it came to its 2011-2012 and 2012-2013 fiscal years.

While S&P had projected a higher deficit than the Government’s original $314 million estimate for the 2011-2012 fiscal year, the $504 million projected outturn also exceeded its forecast.

“In moving forward, we have it [the fiscal deficit] tapering down a bit,” Ms Schineller said. She added that key factors for the Bahamas’ sovereign rating going forward would be the Government’s policy direction, and an assessment of earlier fiscal projections against the current reality.

“It clearly highlights a weakness in the rating that we’ve seen,” Ms Schineller said of the current deficit/debt projections. It’s clearly a reminder that the fiscal dynamics have been a weakness for the Bahamas, and why it has been downgraded.”

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