S&P: Gov’ts fiscal, economic reforms ‘will take time’ to work

* 1.5% average growth forecast lower than IMF’s * Grand Lucayan closure takes out 7% of rooms * Debt to rise through 2020 to 52% of GDP

THE Government’s fiscal and economic reforms will take time to “pay dividends”, Standard & Poor’s (S&P) warned yesterday, as it took a more ‘bearish’ view of the Bahamas’ growth prospects.

The rating agency, in its latest Bahamas country assessment, expressed confidence that the Minnis administration’s fiscal reforms will “arrest the deterioration” in the Government’s deficit and the national debt.

It added that the “strong mandate” granted by the Government’s May 2017 general election victory had created a ‘window of opportunity’ in which to implement fundamental reforms, and set the Bahamas on a new economic and governance track.

However, S&P’s warning that the reforms will take time to pay off is likely to alarm the Minnis administration, given that increasingly fickle Bahamian electorates are demanding instant results and improvements in their daily lives. As a result, the ‘honeymoon period’ for incoming governments has shortened considerably.

“We expect that the measures implemented under the new administration should arrest the deterioration in the Bahamas’ fiscal deficit and debt levels,” S&P’s newly-released report said.

“Winning 35 of 39 seats in the lower house, the FNM was elected with a strong mandate to rein-in government spending, reform the public sector and encourage private sector growth. Strong political capital will likely facilitate reforms early in the Government’s tenure. However, we think that it will take time to see the dividends of these reforms translate into sustainable public finances and higher economic growth.”

S&P also projected that the Bahamas will see only “slightly higher real GDP growth” over the next three years, pegging this at an average of 1.4 per cent.

The rating agency is forecasting that the Bahamian economy will expand by 1 per cent this year, and by 1.5 per cent in both 2018 and 2019. These estimates are lower than the International Monetary Fund’s (IMF), which in its October outlook predicted that the Bahamas will see GDP growth of 1.8 per cent and 2.5 per cent in 2017 and 2018, respectively.

“New room capacity and ongoing tourism projects will lead to slightly higher real GDP growth, averaging 1.4 per cent annually, over the next three years,” S&P projected. “However, growing regional competition in tourism, exposure to weather-related shocks, high energy costs, still-high non-performing loans that clog private sector lending, and high household indebtedness will continue to constrain growth.”

Turning to the $4.2 billion Baha Mar project, S&P added that the development would “need time to [get up to] full capacity” with a further 1,300 rooms scheduled to become operational in 2018.

This followed a net 1,000 room increase in 2017, but the rating agency said Baha Mar’s impact would be partially offset by the Grand Lucayan’s continued closure. It added that this had taken “nearly 1,000 rooms out of commission in Grand Bahama” - a figure equivalent to 7 per cent of the Bahamas’ total hotel room inventory.

While praising the Minnis administration for its commitment to strengthen the public finances, “improve the transparency and accountability of government” and enhance businesses processes, S&P warned it had much to do in addressing the economy’s structural bottlenecks.

“The economy’s falling real GDP per capita growth over the past decade reflects structural challenges that will be difficult to overcome in the near term,” S&P warned. “This growth is lower than that of peers with similar levels of income.”

While the recent revisions to the Bahamas’ GDP data had increased GDP per capita by around 27 per cent compared to previous estimates, the rating agency added it had also exposed the economy’s three-year recession from 2013-2015.

“The new information also reveals more volatile and significant contractions over the past several years,” S&P added. “In our view this largely reflects the economy’s concentration in tourism.

“The sector, which has suffered from weather-related disruptions, delays in major tourism projects, and a general loss in competitiveness, directly represents about 20 per cent, and indirectly close to 50 per cent, of the Bahamas’ GDP.”

On the fiscal front, S&P argued that the Government’s planned 10 per cent spending cut ‘across-the-board’, together with hiring freezes and the non-renewal of contracts for temporary workers, would “reverse” the Christie administration’s pre-election spending binge.

The Minnis administration’s last forecast pegged the 2016-2017 fiscal deficit at $695 million, equivalent to nearly 7 per cent of GDP, and S&P said: “Recent public sector spending measures will bring the deficit down to more sustainable levels in our view.

“We expect that these cuts, together with the impact of one-off post-hurricane spending and revenue measures that will not reoccur in the current fiscal year, will lead to a 3.2 per cent of GDP deficit in 2017-2018.”

This estimate is in line with the Government’s own $323 million projection, but S&P indicated that eliminating the fiscal deficit will occur at a slower pace than the Government is estimating.

“Spending controls, which should benefit from new Fiscal Responsibility legislation and strengthened revenue collection, will continue to reduce the deficit,” the rating agency added.

“We forecast that the deficit will average 2.2 per cent of GDP over the next three years. Excluding the impact of the most recent Bank of the Bahamas (BOB) bailout, we expect that these deficits will lead to an average change in general government debt to GDP of 3.6 per cent from 2017-2020.”

S&P is thus projecting that the $7 billion-plus national debt will continue to rise in the period to 2010, with direct government debt hitting 52 per cent of GDP.

“Significant financing needs in 2017 will push the Bahamas’ net general government debt to 48 per cent of GDP in 2017 from 42 per cent in 2016,” it said. “Thereafter, we expect more moderate deficits will slow the debt burden increase.

“We forecast that net debt will reach 52 per cent of GDP by 2020. At the same time, we expect general government interest payments will average 12.5 per cent of general government revenues from 2017-2020.”

S&P noted that the Government has spent more than $300 million on ‘bailing out’ Bank of the Bahamas (BOB), while the recent $750 million bond would increase this nation’s external debt.

“This issuance adds to the central government’s $900 million in external bonds outstanding,” the rating agency said.  “Following this new debt, we expect the external debt of the public and financial sectors, net of useable reserves and financial sector external assets, to rise to nearly 58 per cent of current account receipts (CAR) in 2017.

“These figures do not include the external debt and foreign direct investment in the islands’ substantial tourism sector.”

S&P continued: “Beyond increasing external debt, large external liquidity needs and errors and omissions continue to contribute to a weak external profile. Errors and omission have increased significantly, accounting for nearly 70 per cent of the current account deficit (CAD) in 2016, compared with 7 per cent five years ago.

“Based on the gross external liabilities of the country’s large banking sector, we expect the gross external financial needs of the public and financial sectors to reach 331 per cent of current account receipts (CARs) in 2017. This reflects the still-high CAD and the financial sector’s high rollover needs.

“However, we consider the sector’s external assets highly liquid, which somewhat diminishes liquidity risk. We expect external liquidity needs to decline over the next three years, but remain above 300 per cent of CAR through 2020.”


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