The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Wall Street last night forecast that the Bahamas’ net government debt would hit 45-47 per cent of GDP by 2013-2014, a double digit rise in three years, as one rating agency slashed its economic outlook on this nation to ‘negative’.

Standard & Poor’s (S&P), the international credit rating agency, in altering its previous ‘stable’ outlook on the Bahamas, warned that a further downgrade to this nation’s sovereign credit rating is in the offing if the Government fails to develop a credible “medium-term plan” to slash the fiscal deficit and sharp debt-to-GDP rise.

Still, the S&P announcement, which came after the markets closed at 5pm yesterday, could have been worse. On the positive side, the Bahamas’ ‘BBB/A-2’ sovereign credit ratings remained unchanged, meaning this nation will not have to pay more interest servicing costs on its foreign-held debt.

In effect, what S&P has done is give the Bahamas’ breathing space to see if the Christie administration comes up with a realistic plan to set the Government’s finances back on the right track.

The rating agency said bluntly: “The negative outlook reflects the possibility of a downgrade if the recently-elected Progressive Liberal Party government does not put forth a medium-term plan to address the higher deficits and to stem the rise in government debt to GDP.

“The negative outlook reflects the increased likelihood of a downgrade if the new administration does not take action to reduce the Bahamas’ fiscal deficit and arrest the increase in debt-to-GDP over the next several years.

“A weakening in our current assessment of the Bahamas’ generally strong commitment to deliver sustainable public finances and economic growth could lead to a downgrade,” the rating agency added.

“Conversely, the ratings could stabilize at the current level if the Government takes a more proactive policy response to reduce debt or if the Commonwealth’s economic prospects strengthen.”

S&P said there had been “continued deterioration in the Bahamas’ fiscal stance” during the 2011-2012 fiscal year, which closed on June 30.

It blamed this on “cost overruns in capital expenditures”, a reference to the New Providence Road Improvement Project, along with the Government’s continued poor revenue performance.

And, noting that there was little scope for improvement in the Government’s fiscal position in the short-term, S&P said the 2011-2012 fiscal deficit, at over 7 per cent of GDP, was set to be followed by one that hit 6.7 per cent.

“The outlook revision reflects our view that the Government’s fiscal profile has continued to weaken,” S&P added.

“The Government deficit, instead of peaking and starting to decline, rose even further in the fiscal year ended June 2012. Capital expenditure cost overruns (essentially on the New Providence roads project) and continued sluggish growth in recurrent revenue pushed the general government deficit to an estimated more than 7 per cent of GDP.

“We expect a general government deficit of about 6.7 per cent of GDP for the fiscal year ending June 2013.

“We don’t expect the overruns associated with capital projects to moderate until the following fiscal year (ending June 2014), when the deficit could fall toward 4.4 per cent of GDP.”

The Wall Street credit rating agency also took issue with the Government’s accounting treatment of proceeds generated from the sale of state-owned assets, such as the $210 million disposal of the Bahamas Telecommunications Company (BTC).

These, and one-off Stamp Tax inflows from deals involving the likes of BORCO and South Riding Point, were critical for the Ingraham administration when it came to plugging fiscal deficits incurred between 2008-2012.

Yet S&P argued that rather than treat asset sale proceeds as capital revenues, they were ‘below the line’ deficit financing and should be considered as such. Some $86 million is currently earmarked as capital revenue.

Arguing that the general election result, which led to a change in government, had “complicated” efforts to reduce the fiscal deficit, S&P added: “The new government sees little room to make a larger near-term adjustment, beyond some expenditure and revenue efficiencies, and it wants to advance some of its own new programmes.

“However, the administration has stated its commitment to reduce the deficit during its term in office. An important component appears to be a potential tax reform.”

S&P projected that the Government’s net general debt would rise from 36 per cent of GDP in 2011 to 41 per cent this year, and hit 45-47 per cent by 2013-2014.

This would represent a double digit rise, in percentage terms, and the Government’s annual debt interest burden now stands at 13 per cent of total revenues.

The Wall Street agency acknowledged, though, that the debt principal and interest burden was mitigated to some extent by the fact that 80 per cent was held by Bahamas-based creditors.

And it projected that the Bahamian economy would enjoy 2.5 per cent GDP growth in 2012 and 2013, up from 1.6 per cent in 2011, based on construction related to FDI growth and an improved tourism performance.

“However, the country’s significant dependence on tourism and the US market is a vulnerability of the Bahamian economy,” S&P said.

“Tourism accounts for more than 50 per cent of the Bahamas’ GDP and employs more than 50 per cent of the labour force, and US tourists account for more than 80 per cent of the Bahamas’ total tourists.”

S&P added that the Bahamas’ external financing gap, which was “high”, was expected to average 145 per cent between 2012-2014. The financing gap represents current account payments plus short-term debt, relative to current account receipts and usable reserves.

“Standard & Poor’s believes that errors and omissions in the balance of payments most likely represent underreported foreign direct investment or tourism inflows and, thus, qualitatively diminish liquidity risks of the officially large external current account position,”the rating agency added.

It identified as another weakness the Bahamas’ narrow tax base, with revenues - at around 20 per cent of GDP - “a long-standing constraint”.

“Taxes on international trade and transactions account for more than 50 per cent of revenue,” S&P said.

“Enhancing that revenue base has been politically challenging, and more recently limited by the timing of the general election.

“A reform to broaden the Bahamas’ tax base would seemingly take several years to conceptualise, pass and implement. In the interim, deficits are likely to remain at higher-than-anticipated levels, absent more significant expenditure adjustment or a boost to growth.”