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Glimmer Of Hope: Ratings Agency S&P Sees Economic Upturn But Private Sector Cautious

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas does “not have enough control over our own plight” to take comfort from Standard & Poor’s (S&P) belief that COVID devastation has “bottomed out”, it was argued yesterday.

Matt Aubry, the Organisation for Responsible Governance’s (ORG) executive director, told Tribune Business this nation was “still too far off” from full recovery to take confidence from the credit rating agency’s decision to upgrade this nation’s economic outlook to “stable”.

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That action provided the one positive for The Bahamas amid S&P’s decision to further push this nation into “junk” status territory, as it downgraded the country’s sovereign creditworthiness from ‘BBB-’ to ‘B+’.

The “stable” outlook, based on the country’s economic recovery prospects, indicates the rating agency will take no further downgrade action over the next 12 months.

“The stable outlook reflects our view that an improving economy will bolster government revenues even in the absence of meaningful fiscal reforms,” S&P said. “The stable outlook reflects our view that the economic recovery presently underway will support government revenues and reduce pressure on government expenditures, supporting a gradual decline in fiscal deficits over the next 12 months. We expect continued, but decelerating, growth in the national debt.”

Mr Aubry, while agreeing that S&P’s action “does give us breathing room in terms of what’s coming down the pike”, nevertheless argued that The Bahamas should not be lulled into a false sense of security that the worst of COVID-19’s economic fall-out is over.

“I wouldn’t say we have enough sense that we are in control of our own plight to feel that’s something to be comfortable with,” he added of the rating agency’s Bahamian outlook. “It’s not something where we can confidently say we are there, and are going to go.

“We have to be very careful in how we look at this.... It’s still too far off to say that we’re at a levelled-off position. We cannot be satisfied with that position, and have to keep pushing for growth.”

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MATT AUBRY

The ORG chief was backed by Gowon Bowe, Fidelity Bank (Bahamas) chief executive, who warned that this nation could just as easily regress further if it became “lackadaisical and nonchalant” about how it manages its fiscal deficit and national debt woes.

“I would caution us to say we should not look at that and believe that. If we don’t stay on the same trajectory, that will change,” he said of S&P’s more optimistic assessment of the country’s economic prospects. “We must not get too high or too low. Have we plateaued or bottomed out? I wouldn’t see it that way.”

Mr Bowe said S&P’s downgrade was likely “inevitable”, given that The Bahamas’ sharp COVID-related economic contraction had dropped 2020’s economic output to around $10bn. At the same time, the $1.348bn deficit had driven the national debt to $10.356bn, sparking a major deterioration in the ratios that the rating agency uses to compare The Bahamas to similarly-rated countries.

“I don’t think it should have come as a surprise to The Bahamas that the rating agencies would have found us to have slipped a bit on our credit rating,” he added. “What’s most important is not to respond to the S&P rating, but how do we right the ship?

“There are a number of things around that we have to bring to fruition. We have to demonstrate we have a debt management strategy and there’s a private sector-led committee working on it. We have to demonstrate we are tightening our revenue collection and reforms, and while there are expenditure demands we cannot allow demand to outstrip our ability to pay for them.”

Mr Bowe, who headed the private sector’s Coalition for Responsible Taxation, said the S&P downgrade appeared to have provoked numerous emotional responses on social media suggesting that The Bahamas do away with the credit rating agency’s assessments or form its own rating agency.

He, however, argued that this did not reflect “the real world” and there was no reason for the likes of S&P or Moody’s to give The Bahamas a free pass. “We are not dealing with monopoly money,” Mr Bowe said. “These are real investors, real lenders, looking at real actions.”

The Fidelity Bank (Bahamas) chief said that while S&P’s analysis showed it was not swayed by Parliament’s political rhetoric, such as the recent finger-pointing over whether there was a “$1bn difference” between the former administration’s pre-election report and the fiscal reality, he warned that “cavalier” statements could ultimately disrupt external fiscal perceptions.

“S&P’s report indicates they don’t pay attention to the theatrics in Parliament,” he told Tribune Business. “They don’t read that type of rhetoric. But we have to be careful that we don’t disrupt the narrative, and be cavalier about our fiscal status, because there will come a time when external observers really don’t have evidence to the contrary.”

The rating agency cited “the failure of successive governments to implement timely and effective” fiscal reforms even prior to COVID-19 as the main rationale for downgrading The Bahamas’ sovereign creditworthiness, with the national debt increasing by $2.4bn in only two years. Interest (debt servicing costs), it added, account for 21 percent of budgeted expenses.

S&P also predicted that the Bahamian economy will expand by the equivalent of 3.7 percent of gross domestic product (GDP) in 2021, a rate that is higher than projections by both the International Monetary Fund (IMF) and the Central Bank of The Bahamas.

But, while its 8.6 percent GDP growth projection for 2022 is also higher than others’ estimates, S&P voiced concern that “slow progress” in enacting fiscal reforms had undermined the Government’s finances even before the double blow inflicted by COVID and Dorian.

“Although successive governments have continued to work on policies and legislation to support their fiscal responsibility mandate, they have not enacted material revenue measures or sustained expenditure cuts,” S&P said, adding that it anticipated the 10 percent VAT rate cut will be “revenue neutral”.

“We believe the new administration will take time to assess the country’s fiscal and debt situation, which may further delay the implementation of new fiscal measures,” the rating agency added.

“We believe the country’s track record of slow progress in reforming public finances and key sectors of the economy has contributed to the weakening of its financial profile over many years, and hurt its economic performance. Most notably, failure to advance public financial reform has led to a marked increase in the sovereign’s debt burden.”

S&P added that any financial reforms enacted by the newly-elected Davis administration will take time to work, saying: “We do not expect financial reforms will reverse the recent deterioration in public finances in the next one-two years. Instead,the economic recovery is expected to be the main cause for smaller fiscal deficits.....

“The Bahamas has faced two large negative shocks in three years, placing significant pressure on government finances and testing the Government’s resolve to put the nation’s finances on a sustainable path.

“The rapid increase in debt over the past few years means The Bahamas’ previous fiscal consolidation plans will likely be insufficient to meet the country’s debt targets without material new revenues, significant cost cutting or economic growth well above historical averages. Furthermore, the country remains vulnerable to environmental risks that elevate The Bahamas’ need for fiscal resiliency.”

Turning to the country’s growth prospects, S&P added: “Despite fairly strong real GDP growth expected in 2021 and 2022, we believe it will take several years for nominal GDP to reach pre-pandemic levels. We expect GDP per capita will be $27,300 in 2021. The pandemic, low historical growth, and repeated natural disasters have weighed on the country’s economy.

“The contraction in 2020 lowered government revenues by more than 10 percent, while health care spending and social transfers drove an increase in expenditures of 11 percent. We expect the fiscal deficit this year will be 8.7 perrcent of GDP, down from 15.4 percent in the previous year.

“We also expect that the change in general government net debt will average 4.2 percent of GDP during 2021-2024. In the short term, we do not anticipate meaningful new revenue measures. We believe a recovering, but still weak, economy could limit the Government’s ability to raise meaningful revenues in the short-term.”

S&P added that it did not expect any new taxes “imminently”, and said: “The deficits will continue to spur the Government’s net debt burden higher to about 86.6 percent of GDP by the end of 2021, while interest payments will remain above 15 percent of government revenues for the next three or more years.

“The government’s interest payments, at 21 percent of revenues, reduce its flexibility to meet economic and social spending goals...... We expect The Bahamas will refinance existing domestic debt internally, but will need to rely on external borrowing to meet its incremental borrowing needs.

“Domestic commercial banks’ exposure to the public sector accounts for almost 20 percent of their assets, which may lessen their ability or appetite to absorb additional exposure. The country’s external debt has risen in recent years, and foreign currency-denominated debt is 44 percent of total debt, underscoring the importance of generating sufficient foreign exchange to meet debt service needs,” it continued.

“We expect the external debt of the public and financial sectors, net of usable reserves and financial sector external assets, will be about 118.8 percent of current account receipts in 2021. These figures include the government’s $2.475bn in external bonds.”

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