The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government will meet with Standard & Poor’s (S&P) immediately after next month’s mid-year Budget in a bid to stave off a further credit downgrade to ‘junk’ status.

Michael Halkitis, minister of state for finance, told Tribune Business that the Government intends “to convince” S&P that its fiscal consolidation achievements to-date more than offset the Baha Mar fallout.

He added that the Christie administration’s attainment of key fiscal targets “should be sufficient” to justify S&P maintaining its current investment grade rating on the Bahamas, regardless of what happens with the stalled $3.5 billion project.

“To be quite frank, when S&P left last time, they said they were keeping an eye on the Baha Mar situation,” Mr Halkitis recalled of its decision to downgrade the Bahamas’ sovereign creditworthiness last August.

“They took a bigger account of how that turned out; if there was an undue delay in opening and its effect on the economy. They’ve rated that very heavily.”

The Government will now use the numbers presented in the mid-year Budget to make its case that the Bahamas’s fiscal consolidation plan remains on track without Baha Mar, and that no further rating action by S&P is warranted.

“Our view is that the bottom line should be the stabilisation of the public finances. Even with the delay at Baha Mar, if we manage the finances, that should go a long way,” Mr Halkitis told Tribune Business.

“At the mid-year Budget we will meet with them, and make a presentation indicating that we are on target. We think that should be sufficient. We have to convince them: Look, man, even with that [Baha Mar] we’re still on target.”

The Government’s position is that Value-Added Tax’s (VAT) implementation, and the increased revenues/reduced deficit this has created, demonstrate that the Bahamas’ fiscal consolidation is already on course.

And Baha Mar’s completion, and eventual opening - at least in the Government’s eyes - will represent ‘the icing on the cake’ in terms of the increased tax revenues, jobs and economic growth it will spur.

The Government’s forthcoming meeting with S&P is another indication of its determination (some might argue desperation) to ward off a further rating downgrade that would take the Bahamas into ‘junk’ status.

S&P subsequently warned there had been no change to its position that “there is a greater than one-in-three likelihood” that it will downgrade the Bahamas’ again within the next six months to two years - a period that begins next month.

Prime Minister Perry Christie has repeatedly cited the prospect of a further downgrade as one of the reasons why the Government is so keen on a Baha Mar resolution being agreed as rapidly as possible, although the project’s Chinese financier appears unmoved by such pleadings to-date.

Mr Halkitis admitted to a Chartered Financial Analysts (CFA) Society of the Bahamas meeting last week that Baha Mar would “weigh heavily” on the Bahamas’ economic outlook during 2016.

Acknowledging that this nation, and the world, were largely locked into “a low growth environment”, Mr Halkitis said the Bahamas’ projected GDP expansion this year was forecast to be between 1.2 per cent and 1.7 per cent.

“We hear what they say,” he added, in reference to the likes of the International Monetary Fund (IMF) and credit rating agencies.

“The big question is the development out west, but fortunately for us we still see tremendous interest in the Bahamas in terms of Abaco, San Salvador, Exuma and the Abaco Cays.

“The hope in everyone’s mind is for a speedy resolution at Baha Mar, but we are in a low growth environment, so it’s incumbent on us [the Government] to manage resources.”

Turning to some of the data that the Government doubtless hopes will impress S&P, Mr Halkitis confirmed that the Government was still projecting a $141 million fiscal deficit for the 2015-2016 Budget year.

He added that this year’s forecast deficit was “just over what we had before” the 2008-2009 recession struck, but still represented a decline to 1.5 per cent of GDP from its peak 6.5 per cent.

“We’re moving in the right direction,” the Minister said. “In next year’s Budget, we expect to have a deficit in the region of $70 million, which is less than 1 per cent of GDP.

“The plan is that we look at, not next year, but the following year (2017-2018) we would have eliminated the deficit. That means we’re not in the red every year, and every year we pay something off [the national debt].”

Mr Halkitis acknowledged that “it’s going to take a long time” before the Bahamas starts to see a significant reduction in its debt-to-GDP ratio, currently around 73-74 per cent, and its $6.5 billion national debt.

“What we want to do long-term is get back into the 30s,” he added of the Bahamas’ debt-to-GDP ratio. “Get it down to a manageable level, where we’re spending 10-12 per cent of revenues to service it.”

Currently, debt servicing and principal redemption account for the biggest line items in the Government’s Budget, consuming more than $260 million of its revenues per annum.

Referring to the upcoming mid-year Budget, and the Government’s plans to eliminate the fiscal deficit and reduce the national debt, Mr Halkitis said: “We expect to say that we are on course for this year, and the outturn is in line with what he had predicted.”

He added that the debt-to-GDP ratio’s growth rate had stabilised, with VAT generating more than $500 million in gross revenues during its first year.

“We believe that it’s a good reform, necessary, and thank God for the smooth implementation,” Mr Halkitis said, “but we recognise that it’s not a panacea.”

He added that the Government needed to maintain its “discipline and continued adherence” to its medium-term fiscal consolidation plan and targets.

S&P last year took a much more pessimistic view than its fellow credit rating agency, Moody’s, focusing heavily on the negative short-term effects of the Baha Mar dispute.

It said it had only kept the Bahamas at ‘investment grade’ because of the Government’s fiscal reform progress to-date, but warned that this needed to be accompanied by higher economic growth rates to “stabilise” the $6.5 billion national debt.

S&P conceded that VAT had raised $150 million in net new revenue during its first six months but, looking beyond Baha Mar, also warned that long-term structural weaknesses in the economy would “depress growth”.

Moody’s, in contrast, elected to take a ‘wait and see’ approach to how the Baha Mar dispute plays out. It decided that the Government’s fiscal consolidation had done enough to justify maintaining the Bahamas’ existing credit rating.

Stronger economic growth remains an elusive objective. It was among the four key fiscal reform goals previously announced by the Government but has, together with tighter management of public spending, been harder to achieve.

Credit rating downgrades ultimately impact all Bahamians, because they force the Government to pay more for debt borrowed on the international capital markets.

This, in turn, sucks more revenue away from essential services, such as education, health. social services and the security forces to ensure the Bahamas is able to service its higher-priced debt.

Should S&P cut the Bahamas’ creditworthiness to so-called ‘junk’ status, it would also impact investor perceptions of this economy - potentially reducing foreign direct investment (FDI) flows, and impacting job creation.