By NEIL HARTNELL
Tribune Business Editor
Moody’s yesterday expressed alarm at the “significantly worse” fiscal deterioration unveiled by the Government’s 2017-2018 Budget, although its lead analyst indicated no ‘junk’ downgrade for the Bahamas is imminent.
The credit rating agency, clearly taken aback by the Minnis administration’s much-revised fiscal forecasts, warned the global markets that its planned $722 million borrowing showed this nation’s fiscal strength was “much weaker” than it had bargained for.
Forced by surprise to adjust its own fiscal forecasts, Moody’s wrote-off its previous projection that the Bahamas’ direct government debt-to-GDP ratio would stabilise below 70 per cent, instead estimating that this will continue to climb through the 2019-2020 fiscal year - in contrast with the Government’s forecast that it will peak near 73 per cent in 2017-2018
Warning that the Bahamas’ debt-to-GDP ratio was the highest for any country it had rated one notch above so-called ‘junk’ status, Moody’s said this nation was seeking to achieve fiscal consolidation from “a more negative starting-off point” - especially given its vulnerability to major hurricanes in the absence of funding reserves to cover damages.
“The Budget indicates that the Bahamas’ fiscal outlook is significantly worse than what we had incorporated into our current projections,” the credit rating agency said. “Revised government estimates point to a higher deficit for fiscal 2017, and deficits (rather than surpluses) in the coming years.
“Wider, serial deficits will lead to rising debt and delayed debt stabilisation. Whereas we previously had expected that debt would stabilise this year, we now forecast that debt-to-GDP will rise until 2019, peaking above 70 per cent of GDP. The combination of significantly worse fiscal deterioration and delayed stabilisation of debt metrics puts downward pressure on the Bahamas’ credit profile.”
Moody’s said the new government’s estimate of a $500 million deficit for the 2016-2017 fiscal year included “revenue underperformance and expenditure slippage” under the former Christie administration, as well as the impact from Hurricane Matthew.
The New York-based rating agency noted that the current fiscal year’s deficit was equivalent to 5.5 per cent of Bahamian economic output (GDP), and contrasted this with both the $350 million (3.8 per cent of GDP) and $100 million (1.1 per cent of GDP) estimates given by the previous government - the former as recently as March 2017.
Pointing to the obvious contrasts and contradictions between the two governments’ estimates, Moody’s added: “Through the first eight months of fiscal 2017, the deficit had reached $290 million, implying a 72 per cent widening of the deficit to match the FNM’s estimate in the past four months.”
“Authorities said that borrowing plans for fiscal 2018 will total $722 million (7.8 per cent of GDP) to cover unfunded spending committed in fiscal 2017, and the expected deficit in fiscal 2018. This indicates that the Bahamas’ fiscal position is much weaker than we had previously expected, even after accounting for the slippage caused by Hurricane Matthew.
“Consequently, we no longer expect the Bahamas’ debt levels, which had already climbed to 67.3 per cebt of GDP from 48 per cent of GDP during the past five years, to stabilise below 70 per cent of GDP. Instead, we expect that they will rise at least through fiscal 2019. At these levels, the Bahamas’ debt-to-GDP ratio will be the highest for an emerging market sovereign rated ‘Baa’.”
Moody’s also described the Government’s deficit reduction, and fiscal consolidation targets, as “somewhat optimistic” given the Bahamas’ four consecutive years of zero or negative economic growth.
It added: “Although fiscal consolidation efforts, including boosting revenues through higher tax compliance and measures to rein in expenditures, have the potential to stabilise the debt trend, the Budget communication clearly points to a more negative starting-off point.
“Additionally, there remain downside risks owing to a still-weak, albeit recovering, economy and the Bahamas’ susceptibility to climate-related events, such as hurricanes, that imply a fiscal cost in the absence of buffers.
“The Budget envisions a somewhat optimistic deficit reduction path through fiscal 2020 without material changes to current policy, particularly in a still weak economic environment,” Moody’s continued.
“The new government forecasts a deficit of $322 million (3.4 per cent of GDP) in fiscal 2018, and deficits of around 2.3 per cent of GDP in fiscal 2019 and 1.1 per cent of GDP in fiscal 2020. This compares with previous official estimates of a small deficit of $28 million (0.3 per cent of GDP) in fiscal 2018 and surpluses beginning in fiscal 2019.”
The only good news from the Bahamas’ perspective is that it retained its investment-grade rating with Moody’s - at least for the moment.
Renzo Marino, the Moody’s assistant vice-president, and lead country analyst for the Bahamas, told Tribune Business that while the 2017-2018 Budget’s contents were “a credit negative” for this nation, it wanted to assess the ‘bigger picture’ as it related to economic growth and fiscal reforms before taking any rating-related action.
“At this stage, the fact the Government sees the fiscal strength is weaker is definitely a credit negative from our perspective,” he said in an interview with this newspaper. “[But] we still want to assess a few things.
“Looking at the Budget document and the projections put there, we want to wait and see how the economy performed last year to give us an idea of what future growth in 2017-2018 might be, especially in the context of Baha Mar and the boost that’s expected to provide to the economy, and how this will affect the debt metrics of the Government. Based on that, we’ll review the rating of the Bahamas.”
Moody’s currently rates the Bahamas’ sovereign creditworthiness at ‘Baa3’ with a stable outlook, keeping it at one notch above ‘junk’ status following a previous downgrade in August 2016.
Unlike Standard & Poor’s (S&P), which downgraded the Bahamas to ‘junk’ earlier this year, Moody’s has taken more of a ‘glass half-full’ position on the Bahamas and given it time to get its economic and fiscal house in order.
That approach, though, may have been jeopardised by the suddenness, and magnitude, of the correction to the Government’s fiscal estimates, which drag out the fiscal consolidation process amid an ever-increasing national debt which - when the liabilities of the public corporations are factored in - is now around 80 per cent of GDP or four-quarters of the Bahamas’ total annual economic output.
Mr Merino said that following last August’s downgrade, Moody’s had expected both the Bahamian economy to start recovering from years of weak performance and the Government’s debt to show signs of medium-term stabilisation.
Even allowing for Matthew’s impact, the rating agency had still expected the debt-to-GDP ratio to peak this year - then stabilise - until last week’s Budget.
“The incoming government presented a worse fiscal situation for the Government,” Mr Merino said. “One of the take aways from the communication, and this is the key, is that without any measures the debt will continue to rise for the next two to three years.”
Moody’s acknowledged the fiscal measures outlined in the 2017-2018 Budget, saying: “The FNM government has stated that over the coming months it will perform a review of revenues and expenditures to identify opportunities for greater fiscal consolidation than what the Budget presented. Authorities also will seek to introduce fiscal responsibility legislation, strengthen procurement processes and increase overall fiscal transparency.”
Mr Merino said Moody’s “understood” that the Government would assess potential measures to reduce spending and enhance revenues within the next 90 days, and wanted to discuss these and other aspects of the Minnis administration’s plans when it made its annual summer visit to Nassau.
The Moody’s analyst’s comments underscore how the Government needs to restore trust in its fiscal credibility, with the nine-figure gap between the Minnis administration’s projections and those of the prior government threatening to undermine business, investor and consumer confidence - as well as that of the credit rating agencies - unless the differences were properly explained.
The Government, in unveiling the 2017-2018 Budget, revealed that the upcoming year’s deficit is projected to be $323 million - an almost $300 million increase from the $28 million in ‘red ink’ that was forecast by the Christie administration just 12 months ago.
Raising further questions about the former government’s fiscal forecasting, the deficit for the current 2016-2017 fiscal year is now estimated to be $500 million - a five-fold increase upon the $100 million that was forecast last May, and $150 million more than the mid-year Budget estimate - given just three months ago in March.
While Hurricane Matthew played a role in the deficit growing 400 per cent beyond projections, the former government was accused of exacerbating the storm’s impact by entering into unfunded spending commitments that had created a $300 million government payables “backlog”.
Based on Moody’s comments yesterday, K P Turnquest, the minister of finance, was right to be concerned about how the rating agencies would react to the 2017-2018 Budget. Much now hinges on whether the Government can provide a convincing explanation when it visits.