The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Standard & Poor’s (S&P) yesterday said “all possibilities are still on the table” over the Bahamas’ sovereign credit rating, with “execution” of Value-Added Tax (VAT) and other Budget measures key to avoiding a further downgrade.

Dr Lisa Schineller, Standard & Poor’s (S&P) senior country analyst for the Bahamas, told Tribune Business that the rating agency was “more conservative” than the Government over the pace at which this nation’s fiscal affairs will be restored to a sustainable level.

She added that despite the 2014-2015 Budget’s content, the Government still had to tackle “outstanding issues”, especially getting VAT on the statute books and subsequent implementation.

And while the Budget, and the Christie administration’s ability to ‘hold the line’ on recurrent spending in the past two fiscal periods, had sent “the right signals”, Dr Schineller said the Bahamas’ consistent failure to meet economic growth projections had been “disappointing”.

Asked by Tribune Business whether the Government had done enough to ward off a further sovereign credit rating downgrade via its Budget fiscal consolidation plan, Dr Schineller replied: “All of the possibilities are on the table.

“We have a negative outlook on the rating, and have to go through it. The VAT has not been presented and passed. There are still outstanding issues.

“The authorities have signalled their intent to go ahead and have all the plans to do so. A key element will be the likely execution of the policy, assuming they get this [VAT] passed.”

Dr Schineller’s comments indicate that the Budget has bought the Bahamas further time to get its fiscal house in order, and the likelihood of a credit rating downgrade has been minimised in the immediate term.

Yet that analysis could be subject to swift change, and the next 12 months will be critical for the Bahamas to show that it is executing - both from the perspective of implementing a fully-functioning VAT and hitting Budget targets for revenue, and deficit and debt reduction.

Failure to achieve some or all of these could spark a further downgrade, and with the Bahamas only ‘two notches’ above ‘speculative’, this nation would then be in danger of losing its ‘investment grade’ rating.

Such a move would result in it having to pay higher interest rates when it borrowers from investors on the global capital markets, increasing the Government’s debt servicing bill.

Dr Schineller yesterday indicated that the Bahamas’ sovereign credit rating might have been downgraded last year, had it not been for the VAT plan announced then.

“We expect a VAT proposal to be coming through,” she said. “That was an important element in not downgrading last year. Certainly, the signalling is there to continue to move forward with the project. Execution will be important.”

The Government’s projected fiscal deficit for 2013-2014 is now projected to come in at $462 million, a figure equivalent to 5.4 per cent of Bahamian gross domestic product (GDP).

While slightly worse than the projected $443 million or 5.1 per cent of GDP, Dr Schineller said the deficit performance was better than S&P’s own 5.9 per cent forecast.

She told Tribune Business: “It was a little more encouraging than what we came out with. Where we do differ [with the Government] is on the trajectory over the next couple of years. We’re a bit more conservative.

“A key element is what is or is not coming in through VAT. What is the revenue take coming from it? Our expectations at this point were more for a slower pace of reduction.”

The Government’s own fiscal projections are for a deficit of $286 million, or 3.2 per cent of GDP, for the 2014-2015 Budget year.

This is to be achieved from a combination of greater revenue, spending restraint and economic growth, with the Government projecting that the deficit will steadily reduce to $129 million in 2015-2016 (1.4 per cent of GDP) and $84 million or 0.9 per cent in 2016-2017.

S&P, though, is forecasting a much more gradual reduction of the fiscal gap. It is predicting it will drop to 4 per cent of GDP in the upcoming Budget year, placing it around $350 million.

Then, in 2015-2016 and 20-16-2017, the rating agency is projecting the deficit will narrow further to 3.2 per cent and 2.5 per cent of GDP, respectively - in both cases 1.5 percentage points of GDP higher than the Government’s estimates.

“You’re going from a deficit of $500 million to closing it in three years,” Dr Schineller told Tribune Business, suggesting that the Government’s estimates might be too aggressive.

“It’s a stronger result than we have. A key element we have is working through the revenue buoyancy experience. If the Government doesn’t have the buoyancy it thinks, what’s it going to do on the expenditure side?”

And, unlike the Government, S&P is projecting that general net government debt will “continue to edge up over the next couple of years.

“This is where you don’t have a debt reduction. We have it continuing to climb, then have it stabilising and a slight reduction,”Dr Schineller added.

She told Tribune Business that another key component for the Bahamas’ fiscal consolidation is economic growth, which has consistently under-achieved and undershot projections in recent years.

The Bahamian economy grew just 0,7 per cent in 2013, and Dr Schineller said: “Growth has come in low. It’s certainly disappointing.

“It was certainly our view that tourism was picking up early this year, so we expect growth closer to 2 per cent this year.”

S&P is projecting GDP growth will hit 2.5 per cent in 2015, buoyed by Baha Mar, but both its estimates are some way below the 2.8 per cent expansion predicted for this year by both the Government and International Monetary Fund (IMF).

Still, Dr Schineller said the Government’s ability to restrain recurrent (fixed cost) spending over the past two Budget cycles had provided a glimmer of optimism in an otherwise gloomy picture.

The Government is projecting that recurrent spending will come in $17 million less than projected this fiscal year, at $1.72 billion as opposed to $1.737 billion, and Dr Schineller said: “Despite the overall deterioration, they’ve held the line on spending, which is an important signal.

“The deficit rose as revenues contracted, but they held the line and that’s important in signalling the execution.”