The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas was yesterday warned that hitting Value-Added Tax (VAT) revenue targets equivalent to 3 per cent of GDP is “key” to avoiding another credit downgrade, with Wall Street also “watching” the Bank of the Bahamas situation.

Standard & Poor’s (S&P), in electing to maintain its existing ratings and outlook on the Bahamas’ sovereign creditworthiness and economy, warned that VAT’s successful implementation was key to a fiscal turnaround.

Lisa Schineller, S&P’s lead country analyst on the Bahamas, told Tribune Business that VAT execution was “the key component” that would determine its next rating action.

And, while the $100 million ‘rescue’ plan for Bank of the Bahamas appeared to be “an isolated case” that was now contained, Ms Schineller revealed that S&P is watching the situation closely.

She added that while the decision to transfer the risk/liability for $100 million in ‘bad’ commercial loans to the Bahamian taxpayer would not add directly to the national debt, it would be included in the Government’s’ contingent liabilities.

This is debt that the Government guarantees on behalf of state-owned corporations and agencies, as it has done in the case of Bank of the Bahamas, via the Letter of Support it has granted.

Ms Schineller yesterday warned that the $100 million in ‘bad’ loans “could weigh” on how S&P viewed the Bahamas’ total national debt in future assessments.

And her analysis also disagreed with Ryan Pinder, minister of financial services, describing last week’s Bank of the Bahamas ‘rescue’ as a “bail out”.

The ‘positive’ in S&P’s announcement yesterday is that it maintained the Bahamas’ ‘BBB/A-2’ sovereign credit rating, together with the ‘negative’ economic outlook.

The fact that the Bahamas avoided another sovereign credit downgrade, with both S&P and Moody’s currently placing this nation two notches above ‘junk’ status, was predictably seized upon by the Ministry of Finance.

It said in a statement: “The report points to important economic and fiscal challenges which must be embraced. The avoidance of a downgrade is indeed credit to the vital reforms which have already been started.

“Unrelenting dedication to fiscal reform, inclusive of the successful introduction of the VAT, will place the Government’s financial house on a stronger footing.

“The Ministry of Finance is committed to shouldering this process, in a collaborative fashion that ensures private sector readiness and broad-bases compliance. This includes a balanced approach to transitioning the business sector to a more transparent and fairer system of revenue administration, and advancing initiatives to bolster more disciplined spending.”

Franklyn Wilson, the Arawak Homes’ chairman, told Tribune Business that the S&P move was “huge” and “very significant” for the Bahamas, as it effectively meant there would be no change to this nation’s borrowing costs - and capacity to borrow - on the international capital markets.

But S&P’s message to the Bahamas was effectively: ‘You’ve brought yourself some breathing space by passing the VAT legislation, but we now want to see the execution, implementation and whether it delivers the projected revenues.

‘And, in doing so, you need to reduce/eliminate the fiscal deficit and start paying down the national debt, while also growing the economy’.

The Bahamas historically has been good at passing laws, but less effective when it comes to executing and enforcing them, and this is what S&P wants to see.

Ms Schineller said Tribune Business’s summation of its message was “pretty much” accurate, and she added of VAT implementation: “That’s the key component.

“Really, it’s [VAT] the centrepiece of the Government’s strategy just going in place. We certainly want to see more signs of the execution on that front. A key component is how the VAT implementation plays out.”

S&P and its fellow ratings agencies usually give countries with a ‘negative’ outlook, such as the Bahamas, a two-year window in which to avoid a further rating downgrade.

That ‘window’ was up in September 2014, but the Bahamas has bought itself time with S&P through August’s passage of the VAT Act and accompanying regulations.

“Passage of the VAT reform has enabled us to maintain our ratings on the Bahamas to-date,” S&P wrote in its analysis.

“Achieving the Government’s target of 3 per cent of GDP in VAT revenues annually will be a key driver as to whether the Bahamas can meaningfully improve its fiscal balance and staunch downward pressure on the rating.

“Disappointment on the fiscal side or increased pressure on international reserves (either due to broader banking problems or persistently high current account deficits) could lead to lowering the rating by one or more notches.”

The Government is projecting that its first half-year of VAT will generate $150 million in new revenues. For its first full year, in the 2015-2016 fiscal year, VAT is forecast to produce $400 million in gross, and almost $350 million net, revenues.

However, S&P said the Bahamas’ sovereign credit rating could stabilise at its current level “if VAT implementation enhances the Bahamas’ revenue buoyancy, if Bank of the Bahamas’ asset quality problems are contained, and if the island’s new tourism offering produces greater economic growth with positive fiscal and external spillover”.

Thus S&P is factoring the anticipated economic growth from the $3.5 billion Baha Mar project’s opening and other developments into fiscal equation, even if its 2014 GDP growth projection for the Bahamas - just 1.1 per cent - is lower than the International Monetary Fund’s (IMF) 1.3 per cent.

S&P is projecting that Bahamian economic growth will increase to 2.5 per cent in 2015, and maintain that level in both 2016 and 2017. This is slightly more optimistic than IMF forecasts.

“The Bahamas’ credit profile remains under pressure amid a stagnant economy, weak fiscal performance, a large current account deficit, and a recent bank rescue,” S&P added.

“Our rating outlook remains negative, reflecting the challenges of putting in place a VAT and reducing fiscal deficits while growth is low and external pressures remain high.”

S&P, though, spent much of its report analysing the Bank of the Bahamas ‘rescue plan’. Ms Schineller yesterday told Tribune Business that it highlighted both the economy’s weakness and low economic growth.

“Our view is that this is contained,” Ms Schineller told Tribune Business of Bank of the Bahamas. “We sort of see it as more of an isolated case, but this is something we would be watching.

“We haven’t formally put it [the $100 million bail out] into the debt stock, but you could think of this as a contingent liability in general....

“That could weigh on how we assess the debt besides the direct kind of debt. At the moment we don’t think that’s an extra negative, but that’s something we would be monitoring. We’ll be keeping an eye on developments.”

S&P’s analysis said the Government saw Bank of the Bahamas as “systemically important” in a system where Canadian banks control 70 per cent of commercial bank assets.

“It does not appear that the problems at Bank of the Bahamas are representative of widespread underprovisioning in the Bahamian banking system because other banks have been more proactive in provisioning or have less risky, more diversified portfolios,” S&P said.

“That said, non-performing loans in the system remain high at 17 per cent as of August 2014, reflecting the weak economy and high unemployment since 2008, and banks have increased provisioning. Notwithstanding Bank of the Bahamas, banks in the Bahamas report high capitalisation levels at 32 per cent of risk-weighed assets in aggregate.”

S&P, meanwhile, added that non-resident deposits in the Bahamian financial system had fallen from six times’ GDP in 2009 to three times’ GDP in 2014.