S&P’s ‘shot in the arm’ exposes growth fears


Hubert Edwards


Tribune Business Editor


Standard & Poor’s (S&P) has given The Bahamas “a shot in the arm” while further exposing that “additional taxation” will almost certainly be needed to hit the Government’s fiscal targets, a governance reformer warned yesterday.

Hubert Edwards, head of the Organisation for Responsible Governance’s (ORG) economic development committee, told Tribune Business the rating agency’s decision to maintain The Bahamas’ ‘B+’ credit rating and ‘stable’ outlook had provided “a level of validation” that the Davis administration’s economic and fiscal policies are on the right track.

However, both he and Kwasi Thompson, former minister of state for finance in the Minnis administration, both argued that a deeper analysis of S&P’s report highlighted significant concerns for The Bahamas beyond the immediate term. In particular, the duo pointed to the rating agency slashing its 2023 economic growth forecast for The Bahamas to just 1.1 percent as a sign this nation will return to anemic pre-COVID expansion levels more rapidly than anticipated.

S&P also asserted that the Government will only hit its signature 25 percent revenue-to-GDP target by the 2025-2026 fiscal year if it introduces new and/or increased taxes or introduces major public spending cuts - options that the Davis administration is currently resisting. Mr Edwards warned that spending cuts, in particular, would be “a double-edged sword” as they could slow gross domestic product (GDP) growth if implemented too deeply.

The rating agency, despite giving The Bahamas some breathing room to demonstrate its fiscal credibility, is thus already sounding the alarm about this nation’s short to medium-term growth prospects and ability to hit key consolidation targets. “The cut in the growth rate is one of the most significant issues,” Mr Edwards told this newspaper. “It seems as if The Bahamas, with some additional pressure from inflation, is quickly going back to its normal growth level.

“That was expected to happen in 2024, and is now happening earlier. This is another signal we do not want to see. We’d like to see growth remain at least above 2 percent, but at 1.1 percent we’re moving rapidly back to normal growth, and that is a challenge because The Bahamas needs to grow well beyond the normal growth rate experiences for the last decade or so.”

His stance was echoed by Mr Thompson, who told Tribune Business: “We cannot deny that we are in a tourism-led recovery, and I believe the ‘stable’ outlook took into account the tourism-led recovery. But the report also highlighted this recovery may not last for ever and be permanent. That is evidenced by the slash in growth projections to 1.1 percent.

“That is very concerning because 1 percent growth is really very, very close to no growth, and 1 percent growth is most certainly not sufficient to reduce unemployment. It’s not where we want to be.... It causes us pause and causes us to be cautious. This thing slashing growth to 1.1 percent, they are most clearly saying next year can be far more challenging and we are not preparing adequately for what is to come.”

S&P’s forecast represents almost a three-quarters or 75 percent cut to the latest International Monetary Fund (IMF) estimate of 4.1 percent GDP growth for The Bahamas in 2023. It based its prediction on growing global risks and headwinds from continued inflationary shocks, a likely US recession and persistent post-COVID supply chain challenges.

“We expect global economic challenges in 2023 will slow The Bahamas’ real GDP growth next year to 1.1 percent. We expect GDP per capita will be $33,740 in 2023. The pandemic, low historical growth and repeated natural disasters have weighed on the country’s economy,” the rating agency continued.

“Despite good growth over the next two to three years, our assessment of the sovereign’s creditworthiness reflects its below-average long-term growth performance compared with that of others at a similar level of development.” And S&P also asserted that the Government’s bid to achieve a 25 percent revenue-to-GDP ratio by 2025-2026 will be a tough ask without new and/or increased taxes and spending cuts.

It said: “The Government has announced its intention to collect revenue of 25 percent of GDP, while shrinking expenses and capital spending to 20 percent and 3.5 percent of GDP, respectively, by fiscal 2025-2026.

“This would result in a fiscal surplus. However, we believe the Government’s goals will be hard to achieve absent new taxes or material spending cuts. The Government has announced two new committees to review revenue policies and public debt strategy. Any recommendations and new policies arising from these committees will take several years before they have a meaningful impact on public finances.”

Mr Edwards told Tribune Business that S&P’s taxation assessment backed his take and that of other domestic analysts. “We fully appreciate the fact 25 percent revenue-to-GDP is a good target, it’s an aspirational one, but I have always been mindful that it’s difficult to reach without additional taxation,” he said. “This is a validation of that point of view.

“The flip side of this, and where the double edged sword comes in, is if the Government can’t achieve that by taxation and seeks to do it by cutting expenditure. It would have a negative impact on the economy in an overall sense as the Government is a significant driver. We’re coming out of a deep recession (COVID) and for there to be cut backs at this point in time could have an adverse impact.

“And if they cut, and cut too deeply, you may get to that target but it’s sort of an artificial achievement. It’s a matter of managing numbers to hit the target. The more comprehensive and holistic solution lies in looking at the whole scope of revenue available to government and making decisions whether there are other avenues for taxation,” Mr Edwards said.

“Nobody wants to push for additional taxation, but at some point the Government and population will have to step back and ask: What does it cost to run these ministries? How can we have growth and buoyancy if we are not implementing these reforms?”

Mr Thompson, meanwhile, told the House of Assembly that S&P’s analysis was bluntly stating that “relying on the tourism recovery alone and attempting to collect unrecovered revenue is not sufficient” to achieve the economic growth and fiscal consolidation that The Bahamas needs post-COVID. He also demanded that the Government “sacrifice” by cutting discretionary spending, and blasted: “They just don’t get it.”

Michael Halkitis, minister of economic affairs, did not respond to a detailed list of Tribune Business questions before press time last night. However, the Ministry of Finance, in a statement said: “The Government remains committed to putting the country on a sustainable path to fiscal consolidation. Performance in the past fiscal year, 2022, and in the first quarter of this fiscal year, 2023, provides ample evidence of this.

“Fiscal 2022 saw deficits fall to 6 percent of GDP from 13.7 percent of GDP in fiscal 2021, and the first quarter of 2023 saw the narrowing of the fiscal deficit to $20.6m - a $115.8m decrease from the deficit of $136.4m experienced in the year prior. The market has taken note of these improvements and has rewarded the country with improving bond yields....

“We continue to believe that as we execute the strategy outlined in our Fiscal Strategy Report and our borrowing plan, there will be improvements in debt affordability and fiscal consolidation, which will put upward pressure on our ratings.”

Mr Edwards said S&P’s non-action, and maintenance of the current Bahamas sovereign rating, was “more than a boost” as this nation could have been “significantly challenged” if it had followed October’s Moody’s downgrade.

“It gives us a shot in the arm, and it gives the Government some level of validation of its plans and, as a result of that, they can be confident from an economic and fiscal point of view that if they continue doing what they’re doing down the road, they’ll be a stronger foundation to build on,” he added.

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