The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A leading Wall Street rating agency yesterday would “not exclude the possibility” that the Bahamas could lose its ‘investment grade’ rating, indicating that it wanted to see a comprehensive fiscal reform package by the 2014 third quarter.

Dr Lisa Schineller, Standard & Poor’s (S&P) senior country analyst for the Bahamas, told Tribune Business that the July-September period would represent “the two-year anniversary” of when the agency placed this nation on a ‘negative outlook’.

She added that countries were typically given a six month to two-year timeframe in which to adjust their fiscal status before S&P revisited their creditworthiness, and assessed whether a sovereign rating downgrade (or upgrade).

Dr Schineller said S&P placed the Bahamas on ‘negative outlook’ in September 2102, and told Tribune Business that the agency wanted to see the Christie administration’s “complete package” of fiscal reforms and the initial results of its execution.

Effectively implying that the Bahamas was running out of time in which to implement comprehensive fiscal reforms, Dr Schineller said she was not surprised that Prime Minister Perry Christie had hinted at a delay to Value-Added Tax’s (VAT) planned implementation.

The Prime Minister, in his Mid-Year Budget address, besides promising that VAT would be implemented at a lower rate than the initially-proposed 15 per cent, said the July 1 implementation date was not set in stone.

“Watching all the discussion via the media, the exact date of an implementation, given the back and forth, it’s not surprising there may some adjustment there,” the S&P analyst told Tribune Business.

“We regarded it as a pretty tough schedule to get something in.”

When it came to the Bahamas’ sovereign credit rating, Dr Schineller said it was “the big picture perspective” that was critical for S&P, which wanted to assess all the factors involved in trying to wrest the fiscal position from its current “deteriorating path”.

“The big thing is what will be presented and planned, implemented and executed,” she said. “We want to see the package that comes out and what is put on the table, what is being signalled on the revenue side and what is being signalled on the expenditure side. It is the big picture put on the table.”

This indicates that the Government will likely have to layout its comprehensive fiscal reform plans, with clearly defined deadlines and objectives, in the 2014-2015 Budget due in May - and answer the questions surrounding preferred tax reform option, rate and implementation date.

Acknowledging that the Budget would be “a very important component” in S&P’s assessment, Dr Schineller said: “We’re certainly expecting a plan to be on the table. We’re certainly expecting details on the plan this year, whether it be the May Budget, and execution and timelines.

“The outlook, generally speaking, is a six-month to two-year time horizon, which puts us in the third quarter more or less as to when those two years would be up.”

Dr Schineller admitted that there was “potential for” the Bahamas to lose its investment grade credit rating, and be reduced to ‘junk bond’ status, which was why it was important to “get more information on the plan and broader strategy to put the fiscal strategy on a sounder footing”.

The S&P analyst’s comments again illustrate the external pressures facing the Government when it comes to fiscal reform, and why it cannot afford to delay decisions on VAT and other related issues for too long.

Observers believe that the Christie administration will likely bring VAT in at 10 per cent, unless studies currently being conducted convincingly show otherwise, by July 1, 2015, at the latest.

That is being regarded as the latest the Government can feasibly leave it, given the internal need to both arrest a $443 million fiscal deficit and $5.5 billion national debt, plus avoid further sovereign credit rating downgrades that will negatively impact this nation’s borrowing/debt service costs.

Dr Schineller said other factors in S&P’s rating calculations would be the Government’s 2013-2014 fiscal performance; whether this year’s Budget tax reforms had yielded their targets; if the administration had been able to “hold the line” on spending; and what plans it had for expenditure restraint going forward.