The Tribune

By NATARIO McKENZIE

Tribune Business Reporter

nmckenzie@tribunemedia.net

Moody’s latest downgrade of the Bahamas’ creditworthiness was “inevitable”, a well-known businessman believes, adding that Value-Added Tax (VAT) will reduce - but not eliminate - this nation’s fiscal deficit.

Dionisio D’Aguilar, Superwash’s president, told Tribune Business: “It was inevitable because the Government needs to address its deficit problem. While I don’t like additional taxes we have no choice but to introduce VAT or some other tax. The Government needs to raise the revenue. The Government also needs to embrace fiscal reform.”

Mr D’Aguilar said increased revenues alone would not solve the Bahamas’ fiscal problems, adding that widespread fiscal reform was needed to prevent the extra money from being squandered.

He explained: “Giving a drug addict more drugs isn’t going to solve the problem with drug abuse. The Government has been abusing the public purse, whether it’s PLP or FNM, and has been running substantial deficits.

“Throwing more money at it is not going to solve the problem. That’s why fiscal reform is so critical to go hand in hand with this tax. We need expenditure caps and a balanced budget amendment, or we need a debt-to-GDP ratio ceiling of 60 per cent.

“We need something to put in place to cause the Government to catch itself before it gorges itself out on all of this money. That’s why it’s so important to go hand in hand with tax reform,” said Mr D’Aguilar.

“I’m sure that 7.5 per cent will make a difference.You are taking 7.5 per cent out of people’s disposable income and that’s going to have the effect it’s going to have. Hopefully it raises more revenue for the Government.

“If I was worried I wouldn’t be expanding my business. I think it may set us back one or two years, and may have a negative effect, but over time everyone will get used to it and life will go on. No one likes more taxes but the alternative is a further downgrade and dollar devaluation. The bottom line is the increase in VAT isn’t going to eliminate our fiscal deficit problem.”

Explaining the rationale for downgrading the Bahamas’ sovereign credit rating one notch to ‘Baa2’, which brings it into line with its fellow rating agency, Standard & Poor’s (S&P), Moody’s said “key drivers” were the continued deterioration in the Government’s financial position and the weak economic growth that had exacerbated this.

It added that the Bahamas’ “debt and interest burdens now exceed those of most Baa-rated peers”. Moody’s said the first key driver for its rating action is related to the weakening of the Bahamian government’s fiscal strength, as reflected by the significant increase in the its debt and interest burdens.

“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),” the rating agency said.

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.

“The second key driver is the weak economic recovery,” Moody’s said. “Following a recession in 2008-2009, the Bahamian economy has averaged annual growth of just 1.1 per cent in the four years through 2013.

“The economy’s underperformance has negatively affected government revenues, and it has also led to higher current and capital expenditures by the Government in order to support the economy.

“As a consequence, the fiscal deficit widened to 6.3 per cent of GDP in fiscal 2012-2013. While Moody’s estimates that the deficit narrowed to 5.4 per cent in fiscal 2013-2014, this shortfall is still more than double the median for similarly rated peers.”