The Tribune

By NEIL HARTNELL

Tribune Business Editor

THE Bahamas' national debt will breach the $5 billion mark before the end of the upcoming 2012-2013 fiscal year, the Government's Budget projections disclosed yesterday, with the debt-to-gross domestic product (GDP) ratio also surpassing the 60 per cent threshold.

Unveiling what fiscal conservatives would likely describe as 'a horror show', Prime Minister Perry Christie unveiled a projected $550 million GFS deficit for the 2012-2013 fiscal year, a sum equivalent to 6.5 per cent of Bahamian GDP.

Together with the projected $504 million deficit for the 2011-2012 fiscal year, which is set to close on June 30, this means the Government will have to borrow more than $1 billion in just two years to cover both its recurrent and capital deficits.

And the $1.054 billion financing gap does not include debt principal redemption, which is set to total $66 million and $121 million, respectively, for the fiscal years 2011-2012 and 2012-2013. Together, that adds a further $187 million to the fiscal deficits, taking the gap between revenues and spending over the two years to $1.241 billion.

The Government's own projections show its direct debt standing at 50.6 per cent of GDP, or $4.057 billion, as at end-June 2012, then increasing to $4.607 billion, or 54.5 per cent of GDP, by the close of the 2012-2013 fiscal year.

Yet this masks the extent of the overall problem, because it does not factor in the $551 million worth of debt the Government has guaranteed on behalf of state-owned Corporations and agencies.

That sum was equivalent to 7 per cent of GDP at year-end 2011. Placed on top of the Government's direct charge, that takes the Bahamas' total national debt to $4.608 billion, or 57.6 per cent of GDP, at June 30, 2012.

And, when added to the projected $4.607 billion direct charge on government at the end of the 2012-2013 fiscal year, the Bahamas' total national debt will hit $5.158 billion - a sum equivalent to 61.5 per cent of national GDP.

And, if the Government's medium-term Budget projections are correct, GFS deficits of $357 million and $272 million in 2013-2014 and 2014-2015, respectively, will take the direct charge to $5.215 billion at the end of the latter period.

Assuming the $551 million in government guaranteed debt remains relatively unchanged, the total Bahamas' national debt will hit $5.766 billion by June 30, 2015, a sum equivalent to 63.3 per cent of GDP.

That indicates the fiscal position will likely continue to weaken despite the improvement generated by positive GDP and economic growth, and also suggests the Bahamas will hit the $5.5 billion debt mark more than a year earlier than the International Monetary Fund's (IMF) 2016 forecast. It also appears that the Government is again relying on economic growth to keep the debt-to-GDP ratio below the 70 per cent the IMF has classified as a 'danger' threshold.

The toll this will exact on the Government's finances, and its ability to fund spending priorities and areas such as education and health, was brought into sharp relief by the Prime Minister yesterday, when he said debt servicing (interests) and debt principal requirements would collectively total $328 million for the 2012-2013 fiscal year - a sum equivalent to 18 per cent of recurrent spending.

Overall, the Budget was pretty much what observers expected, with Mr Christie, as Minister of Finance, performing a delicate balancing act between conveying a message of fiscal prudence and 'holding the line' on the deficit on one hand, while trying to stimulate the private sector and deliver on pre-election campaign promises with the other.

The main 'political battleground' themes surrounding the 2012-2013 Budget were also well-defined yesterday, with the Prime Minister describing the Government's deficit and debt levels, and overall fiscal position, as "much worse than we had anticipated".

Michael Halkitis, his minister of state for finance, went further in castigating the former Ingraham administration for "reckless" spending, particularly during the final months of its term.

He added that the previous government's fiscal policies had "severely constrained our room to manoevere", a signal that the PLP administration will likely lack the financial headroom to implement at least some of its pre-election manifesto promises.

The Opposition Free National Movement (FNM), though, will likely retort that the Government already knew the extent of the Bahamas' fiscal woes, having been fully briefed on the New Providence Road Improvement Project cost overruns and voted on all borrowing/spending resolutions brought to Parliament by the former administration.

It will argue that the Government is simply looking to blame the Ingraham administration, and in doing so, provide a cover for why it is unable to deliver on pre-election promises that the FNM has branded unrealistic.

Still, whichever way it is sliced and diced, the Bahamas' fiscal situation is dire. "The fiscal accounts are in much worse shape than we had expected as we came into office," Mr Christie warned yesterday.

"Indeed, this year's projected GFS deficit outturn is significantly higher than had been forecast by the previous administration last year's Budget communication. The GFS deficit in 2011-2012 is now projected at $504 million, up by a full $256 million from the previous government's estimate of $248 million."

The $256 million overshoot on the GFS deficit is 103 per cent, or more than double, the FNM's 2011-2012 Budget forecast, with the total $504 million deficit equivalent to 6.3 per cent of GDP - an unsustainable level more than double the 3 per cent estimate.

As a result, the Government's direct debt-to-GDP ratio will hit 50.6 per cent at June 30, 2012, as opposed to the 46.2 per cent level projected in last year's Budget.

Mr Christie's presentation, though, indicated that the majority of the GFS deficit overshoot for 2011-2012 was attributable to capital spending set to come in $119 million, or "almost 43 per cent", above target at $399 million - compared to the forecast $280 million.

The Prime Minister said the capital spending overshoot was "due in substantial part to a considerable increase in spending on the New Providence Road Improvement Project".

While faring a little better, the FNM administration also seems set to exceed its recurrent deficit estimates by 54.8 per cent, the projected outturn for 2011-2012 being $257 million as opposed to $166 million.

This, Mr Christie said, was the result of a combination of recurrent revenues "underperforming relative to the forecast" and recurrent spending beating projections at $27 million to hit $1.707 billion. Recurrent revenues for 2011-2012, he added, were set to come in at $1.45 billion, off target by $64 million.

Moving forward, Mr Christie pledged that the Government would move to "redress the unsustainable balance in our recurrent account" through a two-pronged strategy.

This, he said, would involve constraining recurrent spending so it grew in line with the Bahamian economy's growth, and "engineering a transformation of recurrent revenue to bring it to a more appropriate level relative to the size of the economy".

Promising to "hold the line" on recurrent spending in 2012-2013 "to the maximum extent possible", Mr Christie said it was still projected to rise by 6.7 per cent or $114 million to $1.821 billion, compared to $1.707 billion in the last fiscal year.

He added that $55 million of the recurrent spending rise was due "to the increased requirements for debt redemption in the coming period".

As for recurrent revenues, Mr Christie said they were projected to improve to 18.3 per cent of GDP in 2012-2013, up from 18.1 per cent in the current fiscal year. The Government is forecasting an increase from $1.45 billion to $1.55 billion, due to improved collections from Excise Tax and real property tax reforms.

As for capital spending, the Prime Minister said this would remain flat at $400 million in 2012-2013, attributing this to "a large inventory of ongoing projects" - including the $77 million borrowing for the New Providence Road Improvement Project.