The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Moody’s yesterday forecast that the Bahamas’ fiscal deficit will remain above $300 million for this current Budget period, with Hurricane Matthew blowing it slightly higher than the prior year.

The international credit rating agency, in its latest quarterly assessment of the Bahamas’ sovereign creditworthiness, gave an insight into the extent of Matthew’s impact on the Government’s finances by projecting a deficit equivalent to 3.6 per cent of GDP for 2016-2017.

“We estimate that the fiscal balance in fiscal year 2017 will deteriorate to -3.6 per cent of GDP from -2.8 per cent the previous year, due to the negative impact from the damages caused by Hurricane Matthew last October,” Moody’s said.

“As the Government will incur additional borrowing to cover reconstruction spending for public infrastructure, we now expect the central government debt-to-GDP ratio to reach 70 per cent by end of fiscal year 2017.”

While Moody’s estimates are not surprising, its projections for the 2016-2017 fiscal deficit are more than triple what the Government has forecast last May, prior to the unanticipated $600-$700 million in damage inflicted by Matthew’s Category Three-Four storm surge and winds.

The Christie administration had projected a $100 million GFS fiscal deficit for 2016-2017, equivalent to around 1.1 per cent of GDP.

However, Moody’s estimate is slightly higher than the 3.5 per cent GFS deficit that the International Monetary Fund (IMF) estimates the Bahamas incurred in the fiscal year that ended on June 30, 2016.

Taking $8 billion as the size of Bahamian GDP, the rating agency’s estimate suggests that the Government’s GFS deficit for the current fiscal year will come in around $290-$300 million.

Moody’s, though, given that it pegged the $2.25 billion in outstanding consumer credit as equivalent to 25.5 per cent of Bahamian economic output in 2016, is suggesting that this nation has a $9 billion GDP.

Applying the 3.6 percentage to this figure would place the estimated 2016-2017 fiscal deficit at around $324 million, highlighting just how badly natural disasters can blow a nation’s finances off course.

The Government sought to borrow $150 million in emergency credit immediately following Matthew, a target it largely met. However, this increased both the GFS deficit and national debt beyond projection, with Moody’s revised estimate for the latter now placing it at the ratio considered by the IMF as a ‘danger’ threshold.

Moody’s assessment, though, struck a more upbeat tone on the Bahamas’ medium-term fiscal prospects, suggesting that the $6.8 billion national debt and accompanying ratios will peak - and starting declining - by the 2018-2019 fiscal year.

“Thereafter, fiscal consolidation efforts that include boosting revenues through higher tax compliance, as well as measures to rein in expenditures, will contribute to the stabilisation of the debt trend in 2018-19,” Moody’s said yesterday.

“That said, downside risks remain due to a still weak, albeit recovering, economic performance, and the Bahamas’ susceptibility to climate-related events, such as hurricanes, that imply a fiscal cost in the absence of buffers.”

The rating agency was also more optimistic on the Bahamas’ economic outlook given expectations that the multi-billion dollar Baha Mar project will be completed this year and open under new owner, Chow Tai Fook Enterprises (CTFE).

It added that the recent declines in the unemployment rate, and number of discouraged workers, “also reflect strengthening economic momentum”.

“The recent announcements related to the Baha Mar project are in line with our baseline assumptions that underlie our 1.2-2 per cent growth projection for 2017-2018,” Moody’s said.

Still, it acknowledged that the Bahamas’ annual GDP growth had averaged just 0.2 per cent over the past four years, and suggested faster economic expansion would be impossible unless this nation tackled deep-rooted structural problems in its labour and energy markets.

“For 2016 and 2017 we expect growth to remain below the economy’s potential growth rate of 1.5 per cent, after which economic performance could be boosted to around 2 per cent depending on the progress made on the Baha Mar resort,” Moody’s said.

“Over the medium term, structural rigidities in the energy sector and labour market, as well as impediments to ease of doing business, may constrain growth to rates closer to 1.5 per cent.”

Pointing to the ‘stable’ outlook it currently has on the Bahamas’ credit rating, which is one notch above so-called ‘junk’ status, Moody’s added: “The stable outlook also incorporates the expectation that economic performance will strengthen in 2017-18, returning to levels close to the Bahamas’ potential growth of 1.5 per cent.

“Under this baseline, we would see a stabilisation of the Bahamas’ key economic and fiscal metrics, although these metrics would remain weaker than for most ‘Baa’ rating peers.”

For the Bahamas’ credit rating to improve, Moody’s said it required “a strengthening of budgetary processes, including expenditure controls and improvements in revenue collections that lead to a rapid deficit reduction”.

It warned that another downgrade could occur if the Government’s commitment to fiscal consolidation and discipline diminished, and economic growth was slower than anticipated, impacting the Treasury’ revenues.

“The debt-to-GDP ratio exceeds the Baa median (45 per cent), having more than doubled over the last decade to an estimated 67.5 per cent by the end of fiscal 2016,” Moody’s said of the Bahamas.

“Government interest payments relative to revenues have also increased over 13 per cent in fiscal year 2016 from less than 10 per cent in fiscal year 2008, suggesting a somewhat limited fiscal space compared with that of most peers. The Bahamas has the lowest fiscal strength score among sovereigns rated ‘Baa’ (same as Colombia and India).”