By NATARIO McKENZIE
Tribune Business Reporter
THE Government will find it "very difficult" to hit its projected growth targets given the impact of the value-added tax (VAT) rate rise and steep expenditure cuts, a former finance minister has suggested.
James Smith, also a former Central Bank governor, commenting on Moody's latest credit opinion on this nation told Tribune Business: "Moody's pretty much restated their position and the previous rating. A lot of it they pinned on the fiscal consolidation efforts the government has underway which, I think, includes an outlook for economic growth at a little over two percent over the next year. I think that's going to be a very difficult target for the government to meet, the growth in GDP."
Moody's said earlier this week strengthening in The Bahamas' tourism sector and continued foreign direct investment projects will help sustain growth in the range of 1.5 to two percent over 2018-2019. Despite this, the credit ratings agency - in its updated credit opinion on this nation yesterday - maintained the country's Baa3 credit rating with a negative outlook.
This outlook, it said, "reflects potential downside risks to the fiscal consolidation process posed by weaker-than-expected growth, exposure to climate-related shocks in the form of hurricanes, and implementation risks associated with measures to rein in expenditure growth and increase revenue intake". Moody's' warned that absent successful fiscal consolidation, The Bahamas' fiscal and credit profile would likely weaken.
Mr Smith pointed out that government expenditure is a significant portion of GDP.
"They are cutting back on government expenditure as part of the effort and government expenditure is a very important part of GDP. If you're reducing government expenditure and laying off people as they have done in the public service and also reduce the capital budget, government's normal input into our GDP growth from a policy standpoint is being restrained," he said.
"In addition to that we have increased the VAT rate by 60 percent. Without income increases across the board that that basically shrinks the level of consumption which is the largest item in GDP.
"While the fiscal consolidation is meant to meet targets for reducing the deficit it also has an unintended effect I suppose of reducing the rate of growth of GDP. I think all things being equally they're not going to meet that two to 2.5 percent growth in GDP and they also may not meet the fiscal targets because the VAT increase impact will likely lead to a reduction in imports."
Moody's has warned that it would downgrade the rating if, over the next 12-18 months, it observes that government's fiscal consolidation efforts are "unlikely to reduce deficits to levels that would reverse the trend of rising debt ratios and lead to a stabilisation in government debt metrics".
"... We would change the negative outlook to stable if the government's efforts to reduce the fiscal deficit lead to the reversal of the debt trend such that The Bahamas' fiscal strength and policy effectiveness would be consistent with a Baa3 rating. Evidence that measures implemented to rein in expenditures and enhance fiscal policy controls would remain in place over the coming years, ensuring greater fiscal discipline and providing the government with more fiscal space to face shocks, would also support the stabilisation of the outlook," the ratings agency said.