By NEIL HARTNELL
Tribune Business Editor
Moody’s is urging further “restraint” in public spending while predicting that the government will miss the 1.8 percent deficit target set by the Fiscal Responsibility Act for 2018-2019.
The credit rating agency, in an update that accompanied its upgrading of The Bahamas’ outlook from “negative” to “stable”, warned that the government’s $237m deficit objective was still “attainable” but would likely require further spending curbs between now and end-June to hit target.
Moody’s also gave more conservative economic growth projections for The Bahamas than the International Monetary Fund (IMF), forecasting that gross domestic product (GDP) will expand by 1.9 percent in 2019 following two percent growth last year. The IMF had projected 2.1 percent and 2.3 percent, respectively.
And, while acknowledging the tourism-related foreign direct investment (FDI) projects in the pipeline, Moody’s also warned that “the anticipated slowdown” in US economic growth will “weigh” on The Bahamas’ own economic prospects and outlook.
The rating agency’s so-called “credit opinion” thus dims some of the glow that the government was basking in last week following its decision to upgrade The Bahamas’ outlook to “stable” - an indication that it does not currently expect to further downgrade this nation’s sovereign creditworthiness over the next six months to two years.
Moody’s had last week indicated that passage of the Fiscal Responsibility Act, combined with the introduction of quarterly fiscal reports and a reduced deficit for 2017-2018 compared to the prior year’s $661m, had restored some of The Bahamas’ policy-making credibility and prompted the improved “outlook”.
However, the “credit opinion” obtained by Tribune Business indicates it now wants to see The Bahamas deliver by translating all this into results featuring a much-reduced annual fiscal deficit. It pointed to 2017-2018’s “slippage”, when the full-year deficit came in at $410m - a sum $105m higher than the figure given five months earlier by KP Turnquest, the deputy prime minister.
“We think the fiscal deficit target of 1.8 percent of GDP in fiscal year 2018-2019 is attainable as a large share of revenue is collected in the third quarter of the fiscal year,” Moody’s said. “However, this would still require spending restraint in the second half of fiscal year 2018-2019 and efforts to avoid the accounting-led slippage seen in fiscal year 2017-2018.
“Because the government has not built a track record under the new fiscal rules, we have incorporated conservative projections in our baseline scenario with the deficit reaching 2-2.5 percent of GDP in fiscal year 2018-2019. Nevertheless, we project a stabilisation of government debt metrics with debt expected to reach 58.5 percent of GDP in fiscal year 2018-2019.”
The Fiscal Responsibility Act mandates that the Government hit a deficit equivalent to 1.8 percent of GDP in 2018-2019, but coming in at the higher end of the range given by Moody’s may require it to account to Parliament and the newly-established Fiscal Responsibility Council to explain the reasons for the overshoot.
The fiscal deficit measures by how much the Government’s annual spending exceeds its revenues, and thus the extent of borrowings that add to this nation’s $8bn-plus debt. The Minnis administration is hoping to move to a small surplus position, whereby its income exceeds spending, by 2020-2021.
Still, Moody’s gave the Government credit for cutting the 2018-2019 first half fiscal deficit by 70 basis points compared to the prior year, an improvement it largely attributed to the 60 percent hike in the VAT rate.
“In the first six months of fiscal year 2018-2019, the Government reduced the fiscal deficit to 1.3 percent of GDP from 2 percent in the same period in fiscal year 2017-2018,” Moody’s said.
“Revenue increased 14.7 percent year-over-year, mainly reflecting the higher VAT rate (12 percent versus 7.5 percent) effective since August, even amid implementation delays on other measures (higher gaming taxes).
“Expenditures rose by 4.4 percent, reflecting an increase in spending on goods and services related to arrears the Government intends to clear. Wages and capital expenditures, on the other hand, fell in nominal terms.”
Acknowledging the strong tourism and related investment outlook, Moody’s nevertheless warned that dark clouds may be gathering in the medium to long-term due to projections of a slowdown in US economic growth that The Bahamas feeds off so heavily.
“We estimate the economy expanded by about 2 percent in 2018 in real terms,” the rating agency said. “Growth has been driven by the tourism sector and foreign investments that have fuelled construction.
“Tourist arrivals by air increased by 13.8 percent in 2018 after contracting 0.8 percent in 2017. International passenger departures from the Nassau airport were the highest since 2012. Air arrivals in New Providence increased by 18.8 percent between January and September 2018, with the Baha Mar hotel being fully operational.”
Turning to FDI projects, Moody’s flagged Disney’s Lighthouse Point project, which is expected to bring up to 1m cruise passengers to Eleuthera annually, together with Carnival’s proposed $100m cruise port for Grand Bahama and Sir Franklyn Wilson’s $400m Jack’s Bay development.
“The Government expects the project to attract $350-$400m in investments and 540,000-1m visitors to Eleuthera annually,” the rating agency said of Disney. “On the same island, construction has started for the development of Jack’s Bay, which is expected to attract $400m in investments.
“In early February 2019, the Government announced the construction of a cruise port in east Grand Bahama, which will be operated by Carnival Cruise Line, a subsidiary of Carnival Corporation. The port is expected to be completed by 2021 and employ around 1,000 people.” The longer term outlook, though, appears mixed.
“Going forward, tourism and FDI will remain the main growth drivers, with the economy expanding by 1.8 percent and 1.6 percent in 2019 and 2020, respectively,” Moody’s said. “While the US economy’s strong performance has benefited The Bahamas’ tourism sector, the anticipated slowdown in US growth will likely weigh on The Bahamas’ economic outlook.
“However, this will be partially compensated by the development of the new tourism-related projects that will allow economic activity to remain close to its potential.”