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Gov’T And Opposition Trade Blows Over S&P Downgrade

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s attempt to blame the former Minnis administration for The Bahamas’ latest downgrade “does not line up” with Standard & Poor’s (S&P) analysis, an ex-Cabinet minister says.

Kwasi Thompson, former minister of state for finance, in a statement last night argued that the rating agency, in downgrading this nation’s sovereign creditworthiness further into “junk” status, had blamed the actions of “successive governments” - not just one - for failing to implement “timely and effective fiscal reforms” even prior to COVID19.

He spoke out after Senator Michael Halkitis, minister of economic affairs, responded to S&P’s action by slamming the Minnis administration for “ill-conceived debt management strategies” and “imprudent policy choices” that have significantly increased The Bahamas’ external debt through over-reliance on foreign currency borrowing.

“The rating reflects the continued economic and fiscal impact of Hurricane Dorian and COVID-19, as well as the failure of the previous administration to implement meaningful fiscal reforms to existing revenue models and ill-conceived debt management strategies,” Mr Halkitis said in a statement.

“The imprudent policy choices related to borrowing over the past four years have increased our external indebtedness despite the existing domestic capacity.” He hit out after S&P downgraded The Bahamas’ sovereign credit rating, already at non-investment grade status, further to ‘B+’ from ‘BB-’

However, Mr Thompson last night refuted the Government’s narrative, saying: “Standard & Poor’s report does not line up with comments made by the Government. S&P did not blame the FNM administration but successive governments for failure to implement timely and and effective reforms to public finances.

“However, it does state than thanks to the recovery already underway, which was as a result of the Free National Movement’s (FNM) recovery plan, a ‘stable’ outlook has been given to The Bahamas.”

S&P’s report on The Bahamas lends some weight to the east Grand Bahama MP’s push back, as it blamed multiple administrations - both FNM and PLP - for this nation’s fiscal deterioration, which has merely been accelerated by the combination of Hurricane Dorian and COVID-19.

“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.”

What the S&P report confirms is that there is sufficient blame to go around on both sides of the political divide for The Bahamas’ fiscal predicament. And, while its contents may favour Mr Thompson and the former Minnis administration in blaming successive governments, they do not explicitly credit it for the initial signs of economic turnaround detected by S&P.

Mr Halkitis, too, criticised the former administration for over-reliance on foreign currency borrowing that was billed as critical to support the external reserves, and thus the one:one exchange rate peg, at COVID-19’s peak when tourism was shutdown and foreign exchange earnings had slowed to a trickle.

The minister of economic affairs is correct that, on paper at least, there is significant “domestic capacity” to lend to the Government with $2.4bn in excess commercial bank liquidity at end-September 2021.

However, as previously revealed by Tribune Business, many commercial banks and other institutional lenders are at or near their regulatory and prudential limits in terms of what they can lend to the Government.

Mr Halkitis, meanwhile, promised that the Davis administration “understands the urgency” created by the S&P move “and the need for immediate action to reverse the trend of consecutive downgrades in recent years”.

As examples of this action, he cited the supplementary Budget that is designed to align the Government’s finances with the administration’s spending policies but not increase the deficit or national debt.

“Economic recovery and growth are our first priorities in addressing this issue,” the minister said. “We remain committed to strengthening the Fiscal Responsibility Act and public financial management legislation, as well as enhancing revenue administration and reimagining revenue policy.

“We have retooled the Revenue Enhancement Unit and are launching the expert-driven Revenue Policy Committee to propel these efforts. Our goal is to have a 25 percent revenue-to-GDP ratio by 2025. We are also in the process of implementing debt reduction strategies, and facilitating more effective debt management guided by the Public Debt Advisory Committee.”

Mr Thompson, meanwhile, attacked the Government’s planned VAT rate slash to 10 percent as ill-timed given The Government’s revenue needs. He cited a report prepared by the University of The Bahamas’ Public Policy Institute for the Ministry of Finance, which found cutting the VAT rate to 10 percent will cause “only slight improvement” in job creation and economic growth.

The report had nevertheless recommended that the tax cut be “pursued”, but Mr Thompson said: “The key and inescapable critique of S&P is that demonstrated action needs to be taken to close the fiscal gap and reduce the deficits and debts. But, instead, this government has gone in the opposite direction by deciding on a broad-based tax cut at a time when it needs more revenue, not less.”

Mr Thompson referred, in particular, to the report’s findings that there would be “a worsening of the current account, the fiscal deficit and the debt-to-GDP ratio”. He added: “Put simply, this government’s plan will not be revenue neutral according to their own published study,” he said. “Their study and report concluded that the fiscal situation will be worse....

“So the bottom line is that their study has told them that their plan won’t work to stabilise the fiscal situation or to allow them to achieve their economic and fiscal targets.”

However, as pointed out by this newspaper, it was unclear whether the university’s VAT cut modelling accounted for the multiple exemption and zero-rating eliminations planned by the Davis administration, making it impossible to judge whether the report was assessing the exact 10 percent structure that will be passed by Parliament.

The Davis administration believes that returning to a lower-rate, broad-based VAT will make the tax much simpler to administer and enforce, thereby enhancing compliance and reducing the scope for revenue leakage, fraud, evasion and mis-reporting.

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