The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A former finance minister believes the Bahamas’ sovereign credit rating will improve within the next five years, as he slammed a “misplaced” Moody’s report for under-estimating the impact of Value-Added Tax (VAT) and other fiscal reforms.

James Smith, who is also an ex-Central Bank governor, told Tribune Business he was confident this nation’s creditworthiness would improve in “much less” time than that suggested by Moody’s.

He said the rating agency’s “broad brush” analysis, which “lumped together” the Bahamas and five other tourism-dependent Caribbean economies, did this nation a disservice because its economic and fiscal recovery prospects were much stronger.

Tribune Business revealed on Friday how Moody’s assessment suggested the Bahamas’ sovereign credit rating, which is hovering two notches above ‘junk’ status, was unlikely to improve for the next three-five years notwithstanding the prospects for economic and tourism recoveries.

The Wall Street credit rating agency said the Bahamas and its regional counterparts would “continue to struggle with high debt levels” until 2020, despite this nation being poised to enjoy its highest GDP growth rate for five years.

But Mr Smith, countering Moody’s analysis, told Tribune Business: “I suspect our outlook, other things being equal, might be much more favourable.

“You have to factor in for the Bahamas over the short-term, meaning next year, the introduction of Value-Added Tax. That represents about 20 per cent of our revenues, and the equivalent of 3-4 per cent of GDP, so the [debt] ratios will fall more.”

He added: “I think they’re under-estimating the impact of the VAT. The immediate impact of VAT is a reduction in debt. I think we will see an immediate change in the debt ratios.

“I’ve seen people seeking answers as to what the Government is going to do with the extra money; they don’t have to do anything with it. It’s going straight to the debt. As long as you’re running a deficit, it goes to the same pot.”

Mr Smith, who ran the Ministry of Finance for the 2002-2007 Christie administration, also took issue with Moody’s concerns over the Bahamas’ debt servicing burden.

The Wall Street credit rating agency had noted that with 13.6 per cent of government revenues being employed to meet interest payments on its existing debt, the Bahamas was currently performing better than only Jamaica and Barbados on this indicator.

Yet the average debt servicing ratios for Jamaica and Barbados were 34.8 per cent and 24.8 per cent, respectively, in 2010-2014, percentages almost triple and double those of the Bahamas.

Arguing that this nation was not in the same ‘category of concern’ as its two Caribbean counterparts, Mr Smith said: “I felt that a very close comparison to Barbados and Jamaica might be somewhat misplaced.

“On the question of interest payments on the debt, they seem to suggest an appropriate comparable is Barbados and Jamaica, when they’re twice as much.”

The Moody’s assessment also showed the Bahamas had lost the greatest stopover visitor market share in the Caribbean since the 2008-2009 recession, due to a 2.6 percentage point drop.

Yet Mr Smith argued that this, too, was misleading because the Bahamas’ decline was due to supply-side issues as opposed to a reduction in visitor demand for the destination.

While that problem had afflicted other Caribbean tourism spots, he added: “Ours is explained more by the loss of room inventory.

“Our occupancies were down over the last several years because we were improving the plant, and there’s a likelihood the rebound will be much greater because we’ve been affected more by supply than demand. We couldn’t fill the rooms as we didn’t have them.”

Apart from the loss of rooms at the former Wyndham and Nassau Beach Resort’s due to the $3.5 billion Baha Mar project, Nassau/Paradise Island alone also lost the former Nassau Palm and Paradise Island Harbour resorts due to acquisition/renovation.

“I think it will be much less than that,” Mr Smith said of Moody’s suggestion that the Bahamas’ sovereign credit rating will not improve for three-five years.

“If and when Baha Mar gets off the ground, the immediate impact on the employment level and tourist arrivals - if only to see the newness product - means the near term outlook for the Bahamas and performance of the economy is much more positive than the analysis seems to suggest.”

He told Tribune Business that the Bahamas’ proximity to the US meant it should benefit more than its Caribbean rivals from the reduction in global oil prices, and any subsequent air fare cuts as a result of lower fuel costs.

“We’re closer to the US mainland than any of the other countries mentioned, so therefore the impact of oil prices on air travel should be greater for us than others,” Mr Smith said.

“The addition of hotel rooms, the newness of the product...... I think it augurs well.”

Criticising the method employed by Moody’s for its analysis, Mr Smith added: “Using that broad brush, they really missed some of the salient points.

“There’s a tendency to do that; lump all the Caribbean nations together, believing they have the same fiscal characteristics that are caused by the same [issues], and they are not.

“I’d say it [Moody’s analysis] was too region-centric. It should be a diagnosis of the individual countries.”

The Moody’s report also shows that Bahamian economic growth has been stagnant for the past decade, as it averaged 1 per cent year-over-year between 2004-2008 - the same rate it has generated between 2010-2014.