The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Standard & Poor’s (S&P) has agreed that there are “indeed uncertainties” surrounding Value-Added Tax (VAT) implementation, and is less optimistic than the Government in projecting a 3 per cent fiscal deficit for 2015-2016.

The Wall Street credit rating agency, in its full country analysis of the Bahamian economy, signals its own doubts that the VAT roll-out will be smooth, and hints at concerns over the Government’s capacity to manage its new tax.

Pointing to the continued private sector concerns, even though VAT implementation has been pushed back six months, S&P said: “Concerns include not only its [private sector] own preparedness to put reporting systems in place, especially in a culture unaccustomed to tax collection, but also readiness in the Government.

“The Government has been working with its selected software provider for a year but has a small technical team. Given the magnitude of the change this implies for the Bahamas’ tax collection regime, there are indeed uncertainties to successful collection at the onset and during implementation.”

Reiterating just how important achieving the stated VAT objectives will be to this country’s creditworthiness, which is currently hovering two notches above ‘junk’ status, S&P added: “Successful implementation of this VAT will prove to be a key factor in the Bahamas’ ability to mitigate a lack of revenue flexibility and, with it, fiscal vulnerability.”

The rating agency is also much more conservative than the Government when it comes to forecasting how VAT, and other fiscal reforms, will positively impact the Bahamas’ fiscal deficit.

The Christie administration is projecting that the GFS deficit (which strips out debt principal redemption) will drop to 3.2 per cent of GDP for the current fiscal year, and to 1.4 per cent.

Even with debt principal redemption factored in, the Government’s own forecasts place the fiscal deficit at 4 per cent and 2.6 per cent of GDP for 2014-2015 and 2015-2016.

Both estimates are somewhat lower than S&P’s, which are 5 per cent for the current fiscal year, and 3 per cent for 2015-2016 - the first full year of VAT revenues.

“With VAT to be in effect for half of the fiscal year ending June 2015, we expect a more pronounced drop in the deficit to about 5 per cent in fiscal 2014 and 3 per cent in fiscal 2015,” S&P said.

“This assumes ongoing expenditure restraint while VAT revenues materialise in order to first stem and then reverse the increase in the debt burden.

“Our calculation of the change in government debt is on a calendar-year basis, in contrast with the deficit figures. Timing differences aside, the change in debt essentially tracks that of the government deficit.”

S&P added that it expects net general government debt to hit 49 per cent by year-end, up from 43 per cent last year, with this ratio stabilising at around 51 per cent of GDP.

“Debt will continue to rise until the fiscal deficit declines more markedly,” the Wall Street credit rating agency added.

“Interest expenditure rose to almost 13 per cent of general government revenue in the fiscal year ended June 2014, from 9.7 per cent in 2008 and 8 per cent in prior years.

“We expect interest expenditure/revenue to remain high between 10 per cent and 11 per cent in the next several years, with some improvement due to expectation of a stronger revenue base.”

S&P added that the total debt of public corporations equalled 16 per cent of GDP at year-end 2013, with government guarantees amounting to 7 per cent.

And, while the Government’s debt structure had remained favourable, S&P said it had started to rely more heavily on external, foreign currency financing.

It added that this was despite “deep, liquid” Bahamian capital markets, and said: “Domestic debt accounted for closer to 90 per cent of central government debt in 2005-2007, then dropped to 80 per cent in 2009-2011 after the Government did a private placement and, subsequently, increased borrowing from multilaterals.

“In 2012 and 2013, it was 76 per cent. The Government, however, has relied on more external financing in 2014, which brought the ratio closer to 71 per cent mid-2014.

“This is to bolster international reserves despite significant liquidity and appetite for government paper in local markets. Local market issuance has taken the form of shorter-term Treasury bills this year, but the debt maturity profile is favourable,” S&P confirmed.

“About 85 per cent of local currency government debt consists of government securities, whose average maturity is about 11 years. Foreign currency debt, about 95 per cent of which is denominated in US dollars, has a maturity of about 17 years.”

Looking back at where the Bahamas’ recent fiscal woes began, S&P said: “The widening of fiscal deficits reflected a combination of revenue weakness amid low growth, and increased government spending to alleviate the social impact of the recession under the prior government, though with some containment over the last two years under the Christie administration.....

“Revenue underperformance has been a key component of the Bahamas’ weaker fiscal outturn. Vulnerability stems from reliance on taxes on goods and customs (that account for about 50 per cent of tax revenue) which, in turn, depend on imports and tourism and an overall revenue base of about 20 per cent of GDP. The Government’s goal has been to increase revenue without overtaxing the economy - and in doing so has had to manage widespread private-sector complaints.”