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Moody's Downgrade Shows Bahamas Still In 'Emergency Room'

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Tax Coalition co-chair yesterday described the latest Moody’s downgrade as “bittersweet”, comparing the Bahamas’ fiscal condition to “the patient in the emergency room, who’s not stable and certainly not healthy”.

Robert Myers told Tribune Business that despite the Bahamas’ sovereign credit rating being cut to just two places above ‘junk status’, the country had fared “maybe a little better” than expected.

This was because Moody’s had raised its outlook on the Bahamas from ‘negative’ to ‘stable’, based on the Government’s fiscal consolidation plan and future economic growth forecasts, but Mr Myers warned that this was little comfort.

He told Tribune Business that the downgrade, and underperformance on both GDP growth and the Government’s finances, meant the Bahamas still had “a lot of belt tightening to do” and that the fiscal situation would “get worse before it gets better”.

Arguing that the Bahamas’ average 1.1 per cent GDP growth over the past four years was “miles away” from where the country needed to be, Mr Myers renewed his call for a Fiscal Responsibilities Act as a tool to prevent this nation enduring the same reform ‘pain’ again.

Suggesting that the Bahamas had little alternative but to “take the hit now”, Mr Myers labelled the Moody’s report underpinning the downgrade action as “bittersweet”, since it contained both good and bad news.

Pointing to the credit rating agency’s call for further belt tightening, and the need for efficiency and accountability in government fiscal policies, the Tax Coalition co-chair again called for legislation to enforce this.

“We should be implementing the Fiscal Responsibilities Act to make sure long-term we never have to come back to this place,” he told Tribune Business.

“A Fiscal Responsibilities Act would set us up in the long-term for the next 20 years. Let’s take the pain now, implement the laws and procedures to make it happen, and be confident we will have long-term growth and sustainability.

“That’s the key. Let’s take the hit now, and be proactive, not reaactive,” he added. “It is not in my nature to run into a brick wall, back up and do it again.

“If you hit a brick wall, you’ve got to be smart enough not to do it again. You don’t want to make the same stupid mistake. Let’s figure out how to deal with this for the long-term future of the nation.”

Moody’s justified its ‘one place cut’ of the Bahamas’ sovereign credit rating on the grounds of the continued deterioration in the Government’s financial position, and the economy’s underperformance since 2009.

The Wall Street credit rating agency said the Bahamas’ debt-to-GDP ratio, based on its and government forecasts, was likely to peak next year provided the Christie administration met its fiscal targets.

“I figured it would get worse before it gets better,” Mr Myers told Tribune Business. “People are hard headed and don’t like to change....... As a country, we’ve got to manage our future.

“We’re like a patient who has got to the emergency room and still has a long way to go. By no means is the patient healthy. Have we stabilised the critical condition?

“The patient is in the emergency room, but is not stable, and is certainly not healthy. We’re starting to see some vitals, and we’ve made some positive steps, but by no means are we on the path to recovery. We still have a lot of work to do to make that happen.”

Explaining that the Government’s current financial position had factored heavily into the downgrade, Moody’s had said on Tuesday: “The Government’s debt-to-GDP ratio has increased from 31.7 per cent in 2007 to 59 per cent in 2013, and Moody’s expects it to peak in 2015. At this level, it is almost 20 percentage points above the median for Baa-rated sovereigns (39.5 per cent in 2013).”

Moody’s added that interest (debt servicing) payments now consumed 14 per cent of government revenues, compared to 9.3 per cent in 2007, leaving it with little room to deal with unexpected fiscal or economic shocks in the future.

Mr Myers said Moody’s analysis effectively backed his and the Coalition for Responsible Taxation’s position, which was that Value-Added Tax (VAT) needed to be accompanied by wider fiscal reform and policies that “stimulate business growth and economic development”.

While Moody’s upgraded ‘outlook’ on the Bahamas indicated the country was moving in the right direction in some areas, the Coalition co-chair said it also showed the Government needed to improve tax compliance and collection.

Mr Myers said the Government’s recurrent (fixed cost) and capital spending needed to be linked to GDP growth, with cuts made in response to lower growth levels.

“Any downgrade means we have to work harder to implement controls,” he added, noting that the Moody’s report had again highlighted that fiscal reform had to be accompanies by strong Bahamian GDP growth to succeed.

“If GDP growth is lagging, why is that,” Mr Myers asked. “Is it because of our competitiveness, that we’re not doing enough to stimulate small business growth, the formal economy is being over-taxed, education is lagging and productivity low? These are all things we need to look at.”

He added that monetary policy and the relatively high cost of borrowing in the Bahamas, together with energy costs, were other factors all “hugely correlated” with fiscal reform.

“All of these things independently, each one is critical. As a mass, it’s damning,” Mr Myers said, implying that these combined issues helped account for the Bahamas’ low GDP growth and high unemployment rate.

“You cannot have GDP growth if you don’t set up a climate conducive to business growth and development,” Mr Myers told Tribune Business.

“If you’re over-taxing, you’re going to shut businesses down and not encourage them to grow. If productivity is bad and Immigration policy is not flexible, you’re going to shut businesses down.

“These are all exponentially linked. It’s not one. It’s getting the whole scenario right to encourage business development and growth.”

Mr Myers added that the Bahamas was “miles away” from achieving this, with its average 1,1 per cent GDP growth between 2010 and 2013 four to five times’ below what the IMF has deemed necessary to cut current unemployment by 50 per cent and absorb all school leavers entering the workforce.

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