By NEIL HARTNELL
Tribune Business Editor
Moody's yesterday revealed that faith in The Bahamas' fiscal policy credibility had been shaken by the Government's revelation of $760m in total unfunded arrears over the past two years.
The credit rating agency, in its annual full country analysis, said the "frequent deviations" from deficit targets - and differences between the figures presented in mid-year and full-year budgets - had exposed problems with The Bahamas' fiscal transparency and data quality.
"In terms of fiscal policy, the introduction of the medium-term fiscal consolidation plan in 2013 presented clear guidance for the policy framework," Moody's said, in an implicit criticism of the former Christie administration. "However, the weak state of the economy, expenditure rigidities, and exogenous shocks such as hurricanes caused frequent deviations from deficit targets.
"Moreover, fiscal deficit outcomes tended to be revised after being presented in mid-year Budget updates or Budget speeches, which points to issues regarding fiscal data transparency and quality. A particular issue that weighed on fiscal policy credibility involved the revelation by the FNM government, after it took office in May 2017, of large arrears.
"Arrears worth $205 million were incorporated into the 2016-2017 fiscal result, while another $195 million were included in the 2017-2018 outturn. Additionally, as presented in the 2018-2019 Budget, the remaining arrears amount to $360 million and will be mainly covered by the government between 2018-2019 and 2020-2021. These $760 million in arrears represent 6 percent of 2018 GDP."
Moody's acknowledged that the transparency and data quality issues were being addressed but "slowly", through the move to accrual accounting within the public sector and the Inter-American Development Bank (IDB) financed project to improve financial management within the Government.
However, its comments highlight previous warnings by the private sector that frequently missed fiscal consolidation targets, and the absence of explanations and quality supporting data, threatened to undermine the Bahamas' policy credibility in the eyes of international markets and investors.
Moody's, meanwhile, also warned that the Bahamas needs another Baha Mar-scale investment to boost GDP growth above 1-1.5 percent and maintain its fiscal consolidation pace.
The credit rating agency, in its annual full country analysis, said the Government's fiscal deficit will experience "more moderate" reductions over the next three years due to lower economic growth forecasts.
"We expect that with Baha Mar fully operational this year, economic activity will continue strengthening, both in terms of additional tourism flows and higher employment (the resort will employ 5,000 workers)," Moody's said.
"Thereafter, and in the absence of another large-scale investment project, we expect that growth will return to levels close to the Bahamas' potential growth of 1-1.5 percent.... While we expect a more moderate deficit reduction path over the next three years, in part due to somewhat lower economic growth forecasts, we forecast the government's debt-to-GDP ratio to stabilise under 60 percent between 2017-2018 and 2018-2019."
Moody's is forecasting 2 percent and 1.7 percent GDP growth for the Bahamian economy in 2018 and 2019, respectively, slightly below the 2.5 percent and 2.2 percent projections provided by the International Monetary Fund (IMF) earlier this year.
The IMF has previously warned that a consistent average GDP growth rate of over 5 percent, maintained over a five-year period, was necessary to both slash the existing unemployment rate in half and absorb all new workforce entrants.
The Bahamas remains well short of such expansion, and Moody's yesterday gave a not-so veiled warning that the VAT rate hike to 12 percent and other Budget tax increases could weigh on the country's economic growth prospects.
"Fiscal consolidation, both in terms of restrained public spending and higher taxes on consumption, may also weigh on growth over the coming years," the rating agency said. "Additionally, we consider that The Bahamas' growth remains constrained by structural bottlenecks, including issues related to ease of doing business and high energy costs."
Still, the Minnis administration can take some comfort from Moody's prediction that the Government's debt-to-GDP ratio will stabilise this fiscal year before gradually heading downwards towards the 50 percent target set out in the Fiscal Responsibility Bill.
"Short-to-medium-term fiscal challenges include tax collection inefficiencies, particularly related to property and Customs taxes, and large financial transfers to state-owned enterprises (SOEs)," Moody's said.
"In 2017-2018, the government provided SOEs with $429 million in transfers, $79 million more than in the previous fiscal year and about a quarter of current spending. The government will aim to address these issues, which over time would also contribute to the fiscal consolidation process, but we expect that any measures or reforms will bear fruit only in the medium term."