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Moody`S `Warning` Bahamas: Look Again At Fiscal Targets

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James Smith

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas has received a “warning” from Wall Street that it may need to look at its fiscal projections again, a former finance minister adding that until the Mid-Year Budget the “jury is still out” on the Christie administration’s plans.

James Smith, both an ex-minister of state for finance and Central Bank governor, told Tribune Business that even the International Monetary Fund’s (IMF) projections for the Bahamas’ GDP growth “seem a bit optimistic” given the current global environment.

The IMF has forecast the Bahamian economy will grow by 2.5 per cent in 2013, but the Government is predicting nominal GDP growth averaging 3.5 per cent over the coming years as it bids to ‘balance the Budget’ by 2016-2017.

Moody’s, the Wall Street credit rating agency, last week described this and the economic assumptions underlining it as “overly optimistic”, expressing scepticism about whether the Government would meet its targets.

In response, Mr Smith said the key assumption when it came to fiscal projections was determining the economy’s likely GDP growth rate in the short-term.

“Even those by the IMF, which seem to have been the basis, now seem to be a bit overly optimistic,” the CFAL chairman told Tribune Business. “If you look at the difference between actual and projected revenue over the last several years, you’d see we need more than that to balance the Budget.”

Stemming from economic growth forecasts, Mr Smith said the other key projections involved issues such as whether there would be a tax increase “across the board”, and if this would yield the revenue increase projected. Further important considerations were new taxes/tax reform, and their timing.

Analysing the meaning of Moody’s full country analysis on the Bahamas, Mr Smith told Tribune Business: “I see it more as a bit of a warning to say: ‘Guys, take another look at this’.

“The silver lining is we have people with no vested interest in this saying: ‘You have a real problem that needs to be addressed, anfd you need concrete ways and means of handling this’.

“The Mid-Year Budget will be more indicative of what the [Government] plans are, but until we see that the jury is still out a bit. But the point is that if something is to be done to address the problem, the time to do it would be to signal it in the interim Budget.”

Calling for “concrete measures to try and plug that hole” in the Government’s primary Budget, Mr Smith said this had run at a deficit equivalent to 2-2.5 per cent of GDP for several years since the 2008 recession.

Primary deficits, which mean the Government’s recurrent costs far exceed its revenues, “almost automatically feeds into your debt”. Mr Smith said this would force any administration into heavy short-term borrowing, via Treasury Bills, the Central Bank and commercial banks, to meet its fixed costs such as wages and rents.

The former minister reiterated that the high primary deficits had been ‘masked’ during the Ingraham administration by one-off inflows from transactions such as Baha Mar, the BTC privatisation, and the sales of BORCO and South Riding Point.

Questioning whether any more of these deals was left, Mr Smith said the projected $550 million deficit for the 2012-2013 fiscal year, which was around 5 per cent of GDP on the GFS measurement, was “not easily bridged” given the size of the public sector wage bill.

And the present state of the US and world economy meant the Bahamas was “going to have to get incredibly lucky”, unless “elaborate hopes” of a major North American turnaround or explosion in foreign direct investment (FDI) inflows came true.

Moody’s believes the Government’s plan to balance its Budget by 2016-2017 is “overly optimistic”, as it requires an “unprecedented” positive swing of almost $400 million on the primary side alone.

Giving further insight into the reasons behind its recent decision to downgrade the Bahamas’ sovereign credit rating, Moody’s said the Christie administration’s fiscal forecasts were based on GDP growth rates, and debt servicing costs, that were “too favourable” given historical trends.

Also providing an insight into the Government’s own thinking, the Wall Street credit rating agency said the ‘balanced Budget’ plan was based on the Bahamian economy achieving a nominal average GDP growth rate of 3.5 per cent per annum between now and the 2016-2017 fiscal year.

This, Moody’s said, was a full percentage point higher than the 2.5 per cent nominal average GDP growth rate achieved between 2010-2012.

And the Wall Street rating agency added that the Christie administration was also banking on “effective” interest rates on its debt of 4.3 per cent - a servicing cost much lower than the 5.2 per cent average that the Bahamas’ sovereign debt attracted between 2006 and 2011.

Indeed, Moody’s said the effective interest rate on government debt had averaged 5.5 per cent from 2005-2012 - more than one percentage point higher than the Christie administration’s target.

Moody’s indicated that the Christie administration is projecting that it will achieve a primary budget surplus of 1 per cent in 2015, followed by an even greater surplus - equivalent to 2.4 per cent of GDP - in 2016.

A primary surplus means that the Government’s recurrent tax/fee revenues exceed its recurrent (fixed) costs, such as the public sector wage bill and rents. Yet Moody’s said achieving the Christie administration’s primary budget surplus targets would require “an unprecedented correction”.

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