The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Unchecked spending by the Christie administration added a sum equivalent to 3.5 per cent of GDP to the 2016-2017 deficit, Moody’s estimated yesterday, warning that Bahamian fiscal policy credibility has been undermined.

The rating agency, in its annual full country analysis, said constant revisions to fiscal deficits and other targets, coupled with a lack of transparency, had damaged confidence in the Government’s forecasted figures.

“In our assessment, the Government’s small size limits its capacity to formulate and effect fiscal policy, as evidenced by material deviations from fiscal policy targets,” Moody’s said. “Uneven transparency regarding fiscal numbers, particularly with respect to arrears, also weighs on fiscal policy credibility.”

It argued that the former Christie administration’s own fiscal consolidation plan, unveiled in 2013, should have provided a ‘road map’ for then-government to achieve its own objectives.

Yet Moody’s added: “The weak state of the economy, expenditure rigidities, and exogenous shocks such as hurricanes have caused deviations from the deficit targets. We note, too, that fiscal deficit figures have tended to be revised after being presented in mid-year Budget updates or Budget speeches. This points to issues regarding fiscal data transparency and quality.”

Noting that the Christie administration had sought (and failed) to achieve a primary Budget surplus and reduce the deficit to a level that would ensure debt sustainability, Moody’s said Value-Added Tax’s (VAT) introduction had helped to raise revenues by 3 per cent of GDP in one year.

“Despite this strong contribution, fiscal deficits tended to be revised upwards relative to targets as revenues were overestimated and expenditures underestimated – the latter in part due to differences in terms of accounting for arrears,” Moody’s said.

The report confirms that the Minnis administration has much work ahead of it to restore the Bahamas’ fiscal credibility, and that doing so will be key to warding off a further ‘junk’ downgrade of the sovereign credit rating when Moody’s revisits this nation in 12-18 months’ time.

K P Turnquest, deputy prime minister and minister of finance, argued earlier this week that it was “better to be honest and up front” with Moody’s and others over the Bahamas’ true fiscal condition. This, and the Government’s fiscal consolidation plan, appear to have provided the ‘breathing space’ necessary to determine whether this nation can now execute.

Meanwhile, Moody’s explained just why it believes the 2016-2017 deficit could be as high as 7 per cent of GDP or $636 million, compared to the Government’s own $500 million or 5.5 per cent.

With the Christie administration having forecast a deficit equivalent to 1.1 per cent of GDP or $100 million, Moody’s estimated that revenues lost to Hurricane Matthew and other issues had added a further 2.4 per cent or $213.6 million in ‘red ink’.

And ‘additional’ recurrent expenditure and capital spending had added a further 2 per cent and 1.5 per cent of GDP, respectively, or $178 million and $133.5 million. While the latter may have been influenced by Hurricane Matthew repairs, the $178 million in extra recurrent spending is a little harder to explain away just through the storm.

Moody’s estimated that the Bahamas’ total debt-to-GDP ratio will “stabilise” or peak this fiscal year at 80 per cent, up from 67.4 per cent as recently as 2015-2016.

“The deterioration in the Bahamas’ debt metrics has positioned the sovereign as one of the weakest in terms of fiscal strength within the ‘Baa’ category,” the rating agency added. “We estimate that its debt-to-GDP ratios will stabilise around 80 per cent in 2017-2018.

“The larger deficit will have a significant negative effect on government debt ratios in 2016-2017 and 2017-2018 due to the larger borrowing needs – the debt-to-GDP ratio will rise close to 80 per cent from 67.4 per cent in fiscal 2015-2016.

“Following the onset of the global financial crisis, the Government of the Bahamas began posting large fiscal deficits that contributed to a significant accumulation of debt. With the exception of fiscal 2010-2011, when [BTC] privatisation proceeds were used to pay down debt and finance part of the deficit, the fiscal shortfalls have exceeded 4 per cent of GDP.

“Compounded with low economic growth, which led to falling revenue, an increase in government expenditure contributed to the deterioration of the fiscal accounts.”