The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Standard & Poor’s (S&P) has warned the Bahamas needs a “more marked” decline in its fiscal deficits to halt the rising national debt, which it forecasts will grow to 53 per cent of GDP on a net basis by 2018.

The credit rating agency, in its full country report on the Bahamas, warned that while the Christie administration had made progress via Value Added-Tax (VAT) and other reforms, the projected 2.2 per cent fiscal deficit for 2015-2016 was still not good enough.

While the Government is hoping that the Bahamas Electricity Corporation’s (BEC) refinancing will remove $246 million in ‘contingent liabilities’ from its balance sheet, and temporarily arrest the $6.4 billion national debt’s growth, the S&P report illustrated the enormity of the task ahead.

It pointed out that the Government’s debt net of liquid assets had more than doubled since the 2008 recession, growing 1.5x (times’) in percentage terms from “less than 20 per cent” of GDP then to more than 50 per cent now.

Warning that the national debt will continue to rise despite the Bahamas’ reform progress, S&P said: “We project debt net of liquid assets to continue to rise to about 51 per cent of GDP in 2015, from 49.6 per cent in 2014, and then moderate to 53 per cent of GDP by 2018.

“This compares with debt of less than 20% of GDP prior to 2008. Debt will continue to rise until the fiscal deficit declines more markedly.”

S&P is also projecting that the central government’s direct debt-to-GDP will continue growing, albeit it at a more modest pace than in the aftermath of the 2008-2009 recession, hitting 55.5 per cent of GDP by 2018.

S&P added that the Bahamas’ high debt levels would continue to burden the Public Treasury via excessive interest (debt servicing) costs that will continue to suck valuable revenue away from essential public services for years to come.

“We believe interest expenditures continued to rise to 13.1 per cent of general government revenue in the fiscal year ended June 2015, up from 9.7 per cent in 2008 and 8 per cent in prior years,” S&P warned.

“We expect interest expenditure to revenue to remain high, between 12 per cent and 13 per cent in the next several years, with some improvement due to a stronger revenue base.”

Turning to the ‘credit’ column, S&P forecast that the fiscal deficit will continue to decline for the 2015-2016 fiscal year, dropping to 2.2 per cent of GDP compared to 2.8 per cent for the previous 12 months.

That forecast, though, does not appear to take into account the repair bill created by Hurricane Joaquin, which the Prime Minister recently said could be as high as $56 million for government buildings and public infrastructure.

Still, praising VAT implementation and the likely achievement of the Government’s revenue targets, S&P said: “New VAT revenues have helped to lower the deficit closer to pre-recession levels.

“We expect the increase in revenues, which will lead the decline in the deficit, raised the central government’s revenues by about 20 per cent in nominal terms in the fiscal year ended in June 2015, compared with the previous fiscal year.

“By our estimates, this will bring government revenues to 23 per cent of GDP, more than 4 per cent higher than the low of 19 per cent reached during the Great Recession in 2009.”

Acknowledging that VAT had altered the “fiscal trajectory” from one that saw the fiscal deficit reach 6.6 per cent of GDP in the 2012-2013 Budget year, S&P said the new tax had generated $150 million in net revenues during the first half of 2015.

“This puts the Government on track to collect at least 3 per cent of GDP in new net revenue during the first full year that the VAT is in place, which was the Government’s initial goal,” S&P said.

“In our opinion, the VAT introduction should also have positive spillover effects for the formalisation of the Bahamian economy. Given that Business Licenses are a requirement for VAT registration, businesses that were previously operating without a license are now required to do so to qualify to offset their credits against VAT.

“Additionally, the Government introduced an electronic filing of customs import declarations and online payment of Customs duties, which has increased transparency and which we expect to strengthen the revenues collected, despite a lowering of many of the Customs duty rates,” it added.

“The Government also aims to strengthen and modernise the property tax department by investing in the reassessment of property taxes, and to align the management system with the other new, online systems. This department has historically been a weakness in the Government’s revenue management.”

S&P forecast that the Government likely earned $12 million in net new revenues as a result of legalising the web shop gaming industry, and the subsequent taxes levied on the sector.

And, while more than one-quarter of the Bahamas’ debt is now owed to non-Bahamian creditors, S&P said the structure “remains favourable”.

“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,” S&P said.

“In 2012 and 2013, it was 76 per cent. The Government, however, relied on more external financing in 2014, which brought the ratio to 72 per cent in the second quarter of 2015. The 2014 external financing sought to bolster international reserves, despite significant liquidity and appetite for government paper in local markets.

“The Government’s maturity profile remains favourable, however. About 76 per cent of local currency government debt consists of government securities, whose average maturity is just under 10 years. Foreign currency debt has a maturity of about 14 years.”

The concern here, though, is that increased external and foreign currency-denominated debt will in turn raise the pressure on the Bahamas’ external reserves to meet due interest (debt servicing) payments.

With foreign direct investment (FDI) and foreign currency earnings not replenishing the reserves to the extent previously, the worry is they could be depleted by increasing external debt payments.