The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas needs a $160-$180 million 'positive swing' on its primary Budget balance to "stabilise" the debt-to-GDP ratio, with an even "stronger adjustment" needed to slash the $7 billion-plus national debt.

The Inter-American Development Bank's (IDB) latest Caribbean Quarterly Bulletin lays out the scale of the task facing the Government, and wider Bahamas, in trying to arrest this country's fiscal crisis.

While modelling suggests that the Bahamas' debt growth rate will ease "over time", even if the economy is hit by adverse shocks, the IDB paper warned that the total debt-to-GDP ratio could peak at 85 per cent in the medium to long-term.

"The Bahamas' debt-to-GDP ratio (including publicly guaranteed debt) is expected to range between 70 and 85 per cent of GDP over the medium to long-term," it said.

"The probability that the debt trajectory rises above 75 per cent by end of 2017 is 95 per cent, highlighting the need to continue fiscal consolidation efforts to reverse the increasing trend."

The Minnis administration's own Budget projections show that the Government's direct debt, as a percentage of GDP (Bahamian economic output), will hit 72.7 per cent by the fiscal year-end for 2017-2018.

Adding in debt the government has guaranteed on behalf of the public corporations and agencies, equivalent to about 9 per cent of GDP, means that the total debt-to-GDP ratio will be close to 82 per cent by June 30 next year - just shy of the IDB's 85 per cent peak.

"Our estimates suggest that the Bahamas' debt-to-GDP ratio would continue to rise in the short-term and stabilise at 78 percent, with downside risks," the IDB paper said. "The modest tourism recovery, any further delays to the comprehensive opening of the Baha Mar mega resort and its respective economic contribution, and modest fiscal consolidation (particularly on the expenditure side) are downside risks to growth over the next two to three years.

"Upside risks include materialisation of the Government's projected pipeline of tourism-related projects and respective private capital inflows. In addition, faster recovery in the tourism sector with growth in arrivals and higher spending per tourist could also contribute to growth above the baseline."

The IDB said the International Monetary Fund (IMF) is projecting that the Bahamas' primary balance (revenues minus spending), but which strips out interest payments from the latter, could improve to a positive 0.7 per cent in 2017-2018.

However, this appears somewhat optimistic, given that it is largely based on Baha Mar and investment projects that have yet to come to fruition - such as the Freeport Container Port expansion, Children's Bay resort development in the Exumas, and the Mediterranean Shipping Company (MSC) project on Ocean Cay.

With the Bahamas projected to run a 0.3 per cent primary deficit for the 2016-2017 fiscal year, the IDB said post-Matthew reconstruction and relief efforts had likely increased the Government's debt-to-GDP ratio by 2.5 percentage points to around 77 per cent - a level well above the IMF's 'danger threshold'.

"Simulations show that the Bahamas would need to adjust the primary balance by 2.17 percentage points of GDP to stabilise its debt-to-GDP ratio," the IDB said. Given that Bahamian annual GDP is between $8-$9 billion, this implies that a $160-$180 million swing 'into the black' is required by the Minnis administration.

Many observers believe faster economic growth is the key element to resolving the Bahamas' fiscal and unemployment woes, but even here the IDB report was less than encouraging.

"The Bahamas faces a tepid growth outlook," it warned. "Growth has been averaging 0.5 per cent over the past 10 years. Real GDP is projected to grow by 1.4 per cent in 2017, compared to flat growth a year earlier. The International Monetary Fund's projected average medium-term growth rate for the next five years is 1.7 per cent."

The only 'positive' takeaway from the IDB report is that the Bahamas' debt-to-GDP ratio would still stabilise over the medium to long-term, even if the economy suffered sudden shocks.

Yet even here it warned that "a stronger adjustment" is required if the Bahamas is to slash, rather than merely stabilise, its $7 billion national debt and accompanying ratios.

"A simulation of the expected medium-term debt trajectory, subject to growth and interest rate shocks sustained over the two-year period from 2017-2018, suggests that even under adverse shocks the debt path stabilises over time," the IDB paper said.

"The Bahamas remains vulnerable to shocks. Simulations of the sensitivity of the debt trajectory, using a one standard deviation shock sustained over the two-year period from 2017-2018, suggest that under all shock scenarios the debt path stabilises over time, though at a higher level, implying a stronger adjustment is needed to decrease debt in the medium to longer term.

"The Bahamas is most sensitive to declines in GDP growth, lower than projected primary surpluses or a combination of several shocks, all of which would shift the debt trajectory up. In contrast, the Bahamas is less sensitive to interest rates shocks, partly because interest rates have been relatively stable in the past."