By NEIL HARTNELL
Tribune Business Editor
The Minister of Finance yesterday conceded he was concerned about how the credit rating agencies will react to a five-fold increase in the projected 2016-2017 deficit, plus $722 million in new government borrowing.
K P Turnquest told Tribune Business that he hoped the new administration’s greater fiscal transparency would help to convince Moody’s and Standard & Poor’s (S&P) that it can “turn this thing around”, and ensure the Bahamas avoids a further downgrade of its sovereign creditworthiness - which is already at ‘junk’ status with the latter.
Both rating agencies are due to visit Nassau for their annual visits this summer, and will likely be seeking an explanation for why the Bahamas is missing its previous fiscal projections by hundreds of millions of dollars.
“Obviously we are concerned about how they may view this thing,” Mr Turnquest said of Moody’s and Standard & Poor’s. “We give due regard to their considerations.
“On the other side, I believe with our being transparent, forthright and honest, they will gain comfort we will turn this thing around, and provide positive economic growth rates and fiscal management.
“The situation is what it is. These things are not necessarily in our control.”
The Government’s 2016-2017 fiscal deficit was yesterday projected to come in at $500 million, five times’ higher than the original $100 million projection, and some $150 million higher than the revised post-Matthew projection given by the Christie administration.
Mr Turnquest yesterday blamed the overshoot on a combination of Matthew, recurrent spending exceeding estimates by $137 million, and a $320 million “backlog” of unfunded spending commitments entered into by the former government.
The Minnis administration also forecast that the 2017-2018 fiscal deficit will be $323 million, almost $300 million higher than the former government’s $28 million estimate just 12 months ago. And, rather than achieving a GFS surplus from 2018-2019 onwards, the new government is forecasting that it will incur deficits of $228 million and $109 million over the following two fiscal years.
The Government also predicted that direct government debt would hit $6.797 billion at the 2017-2018 fiscal year-end, a sum equivalent to 72.7 per cent of Bahamian GDP or total economic output. When the $500 million of contingent liabilities are added in, equivalent to around 9 per cent of GDP, the Bahamas total debt-to-GDP ratio is set to remain at above 80 per cent through the 2019-2020 fiscal year, although coming down slightly because of improved GDP growth.
All of which is likely to make the credit rating agencies nervous, notwithstanding Baha Mar’s opening - the property’s fate having been a major factor in previous downgrades. While Moody’s and S&P both have stable outlooks on the Bahamas, indicating no further downgrades are likely imminent, the pace of the latest fiscal deterioration could cause them to reassess this position.
“We fundamentally believe, on the information coming in over the last few weeks, that we will be able to cause growth in the economy and get the fiscal situation under control,” Mr Turnquest told Tribune Business.
“Once they [the rating agencies] come here, hopefully we will be able to lay out our case for their support.”
Gowon Bowe, the Bahamas Chamber of Commerce and Employers Confederation’s (BCCEC) chairman, acknowledged that the visits of the rating agencies were “not far away”.
“I wouldn’t go to the point of a downgrade,” he said of their likely reaction, adding that the key was for the new government to demonstrate its credibility by producing a concrete, data-based plan to show how the Bahamas will escape its fiscal and low-growth woes.
However, Robert Myers, a principal with the Organisation for Responsible Governance (ORG), yesterday agreed that the Bahamas will be “lucky to avoid a downgrade” based on the new fiscal numbers.
He added that the new government had to follow through on its promises regarding transparency and accountability, which would help “restore some of the trust these guys [the rating agencies] need that we’re turning the corner”.
For the 2016-2017 fiscal year, revenues were some $216 million below projections at $1.96 million, while capital spending exceeded estimates by $68 million - both developments largely being due to Hurricane Matthew. Zero GDP growth also impacted the revenue figures.
Mr Turnquest yesterday told the House of Assembly that the fiscal estimates for the next three years represented a ‘floor’, or base case scenario, where the Government planned to beat projections - starting with the $31 million primary deficit forecast for 2017-2018.
“In the multi-year scenario, recurrent expenditure is projected lower by some $200 million in each of 2018-2019 and 2019-2020, to levels in the area of $2.45 billion,” Mr Turnquest said. “This is largely due to significantly lower debt redemption payments each year.
“Capital expenditure is projected to remain around 2.3 per cent to 2.4 per cent of GDP in the outer years, with annual levels on the order of $230 million, essentially unchanged from 2017-2018.
“For its part, recurrent revenue is assumed to remain at 23 per cent of GDP going forward, implying levels on the order of $2.2 billion and $2.3 billion in 2018-2019 and 2019-2020, respectively.”
He added: “As a result, the GFS deficit may be expected to decline steadily to levels of $228 million in 2018-2019, and $106 million in 2019-2020. That would represent 2.3 per and 1.1 per cent of GDP, respectively.
With these developments, the level of Government debt would still continue to rise, reaching $7.1 billion at the end of the projection horizon. However, with the smaller annual deficits that are projected, the ratio of Government debt-to-GDP would begin to decline in 2018-2019, from the peak of 72.7 per cent in 2017-2018, and would reach 70.8 per cent of GDP in 2019-2020.”