By NEIL HARTNELL
Tribune Business Editor
The Bahamas’ 2016-2017 fiscal deficit could rise as high as $636 million or 7 per cent of GDP, Moody’s has warned, due to the Christie administration’s pre-election spending binge.
The rating agency, in an August 25 ‘credit opinion’ that accompanied its decision not to downgrade the Bahamas’ to ‘junk’ status, suggested that the ‘red ink’ could amount to $136 million more than the Government’s own $500 million estimate - a difference equivalent to 1.5 percentage points of gross domestic product (GDP).
Moody’s estimate is almost double the former Christie administration’s own $350 million forecast, with the rating agency disclosing that the 2016-2017 deficit had been inflated by an accounting method switch.
The Deputy Prime Minister defended this move, telling Tribune Business: “The best policy is to be up front and honest.”
K P Turnquest said Moody’s decision to leave the Bahamas’ with an investment grade credit rating was vindication of the Minnis administration’s sudden switch to accrual-based accounting for the 2016-2017 fiscal year.
This switch away from the Government’s traditional cash-based accounting system resulted in the former Christie government’s pre-election spending commitments - for which funds have yet to be disbursed - being included in the 2016-2017 fiscal year calculations.
These commitments would traditionally have been accounted for in later years when the spending kicked in, but their inclusion in the 2016-2017 fiscal year helped to produce the dramatic upward deficit revisions by both Moody’s and the Government.
Moody’s cited the accounting switch to explain why the Minnis administration’s 2016-2017 deficit estimate was so radically different from its predecessor’s $350 million estimate.
And, with half of the $400 million in extra borrowing to cover that ‘red ink’ incurred during 2016-2017, Moody’s pegged the Government’s net borrowing for the current 2017-2018 fiscal year at $522 million or 5.6 per cent of GDP.
“Upon taking office, the new administration announced a Budget deficit estimate for fiscal year 2016-2017 of around $500 million (5.5 per cent of GDP), significantly higher than the deficit target of $350 million expected by the outgoing administration, reflecting election-related spending that the PLP’s $350 million target did not recognise,” Moody’s said.
“However, subsequently, the new administration decided to incorporate expenditure items into the fiscal year 2016-2017 Budget that the former administration had committed to pay but for which payments had not yet been disbursed – some of which were related to reconstruction following Hurricane Matthew, while others were linked to further election spending commitments made by the previous administration.”
Moody’s continued: “This approach would be similar to accrual accounting and arrears, and would under our estimates take the deficit number closer to 7 per cent of GDP.
“While half of the $400 million approved borrowings to cover the larger than expected deficit for fiscal year 2016-2017 was raised during that year, the balance together with the new borrowing needs would be raised in fiscal year 2017-2018. The net borrowing to be undertaken for fiscal year 2017-2018 is $522 million or 5.6 per cent of GDP.”
The latter figure includes both the outstanding $200 million to cover the previous year’s fiscal deficit, and the $322 million worth of ‘red ink’ projected in the 2017-2018 Budget. Moody’s will likely have obtained this information when it asked the Government to explain the discrepancies between its deficit projections and those of its predecessor, even though they came just two months apart.
This was a key factor in prompting Moody’s to place the Bahamas on review for a downgrade which could have cost this nation its ‘investment grade’ rating, and left it at ‘junk’ status with both the major international credit rating agencies.
However, Mr Turnquest defended the Minnis administration’s actions were essential to set out “the truth” and reality of the Bahamas’ stressed fiscal position - both for the Bahamian people and the rating agencies.
He argued that this could only be done by incorporating the Christie administration’s election spending commitments into 2016-2017, when they were incurred, and said the Government’s decision had been rewarded by escaping a potential downgrade.
“When we did our Budget presentation, we would have been aware of [spending] commitments that were past due or imminent. We made a forecast with those things in mind,” Mr Turnquest told Tribune Business.
“The fact we’ve been able to maintain the rating would probably say we did the right thing in being up front and honest with the Bahamian people in the first instance, and the rating agencies in the second instance.
“There’s no point in trying to hide the truth from the public,” Mr Turnquest, who is also Minister of Finance, continued. “The best policy is to be up front and honest.
“Despite what they say about us talking down the economy, this is being honest, frank and up front in addressing the problem. We have been very frank with Moody’s, and they have agreed with us, in the main, that we are on track in terms of how to address the issues.”
The Deputy Prime Minister added that the Bahamas’ national accounts, due to be released within the next week or so, “will bear witness to what we have to say”.
Stating that these would provide “an accurate picture” of the Bahamas’ economic and fiscal reality, Mr Turnquest added: “If I’m wrong, at some point you can ask me these questions again.”
The Deputy Prime Minister, in his June 7 Budget presentation, said the Minnis administration had inherited a $292 million payments ‘backlog’ at the Public Treasury. This included some $161.283 million in approved payment requests, which were awaiting funding, and another $130.780 million in spending commitments for which no funding sources had been identified.
Moody’s ‘credit opinion’, though, is likely to trigger another political ‘back and forth’ over the true size of the 2016-2017 deficit and the Government’s financial affairs in general. It also explains why the Central Bank pegged the 10-month deficit through April 2017 at $284.7 million - well short of the administration’s forecast - because it was using the cash-based accounting system.
The Opposition is likely to argue that the accounting method switch was intended to pin the blame for the Bahamas’ fiscal woes squarely on the former Christie administration, which was on target to hit its $350 million post-Hurricane Matthew deficit target.
It will also probably claim that in announcing a $500 million deficit, the Government created an unnecessary panic and brought the Moody’s downgrade review upon both itself and the country.
Mr Turnquest acknowledged: “I would do the same thing if I were them, but the facts are the facts.” He and the Minnis administration are likely to further counter that the Government should have switched at an accrual-based accounting system years ago, and that they are now providing the Bahamas and world with this country’s true fiscal position.
Moody’s research note ultimately underscores that the Bahamas desperately needs to shift to an accrual-based method, and modern, transparent methods for managing the public finances. Doing so would also end the finger-pointing every five years when a new administration accuses its predecessor of leaving it with unpaid, previously unknown bills.