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Bahamas locked into low growth by ‘rigidities’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas will remain locked into low 1-1.5 per cent economic growth rates unless the Government tackles “several structural rigidities” such as high energy costs, Moody’s warned yesterday.

The rating agency, in its half-yearly assessment of the Bahamas’ sovereign creditworthiness, praised the Government for initiating energy sector reforms via the Bahamas Electricity Corporation (BEC) management contract with PowerSecure, but said similar reforms were needed in other areas.

It specifically targeted “the bureaucratic burden” that inhibits the so-called ‘ease of doing business’ in the Bahamas, warning that this nation would continue to suffer high unemployment/low economic growth unless its competitiveness improved.

“The Bahamas’ potential growth rate will remain at this relatively low level unless several structural rigidities, including the efficiency of the energy sector, high levels of unemployment and a bureaucratic burden that thwarts ‘ease-of-doing business’, are addressed,” Moody’s said.

“The Government has started to tackle some of the problems in the energy sector by selecting a private US company, PowerSecure, to manage the state-owned BEC, which would be tasked with increasing efficiencies while lowering costs.

“Additionally, potential changes to the regulatory framework, including having the Utilities Regulation and Competition Authority (URCA) oversee the energy sector, could open up the industry to more private sector players, thus increasing competition and investment,” it added.

“Should these changes foster increased efficiencies in energy generation in the Bahamas, the islands’ competitiveness would improve, especially for the tourism sector, since electricity accounts for a relatively high portion of costs in the industry.”

Outlining what will happen if the economic ‘status quo’ remains, Moody’s said the Bahamas’ “below-trend growth performance” continued during 2015.

“Despite gains in tourist arrivals - stay-over arrivals rose 4.5 per cent in the first 10 months of 2015 - we estimate that output likely expanded at the lower end of 1-1.5 per cent last year,” the rating agency said.

Although it had expected Baha Mar’s now-postponed opening to drive 2 per cent growth in 2016, Moody’s said yesterday: “We now expect that growth in 2016 will continue to recover as tourism flows from the US, in particular, rise, likely reaching 1.5 per cent.

“Other factors supporting economic activity in the Bahamas are mainly related to further foreign investment in the tourism sector and associated increases in employment.

“If the opening of Baha Mar is pushed to late 2016 or sometime in 2017, this will boost growth closer to 2 per cent next year. Yet we forecast that after the initial boost, growth would likely converge again with the Bahamas’ 1.5 per cent potential growth rate.”

Moody’s gave the Bahamas a low’ economic strength rating, with this nation’s high per capita income levels “offset” by this country’s small size, lack of diversification and “weak growth dynamics”.

It did, though, give this nation high marks for ‘institutional strength’, based on the Bahamas’ scores on Worldwide Governance Indicators.

These place this nation’s “government effectiveness, rule of law, control of corruption and other dimensions of institutional quality in or around the 70th percentile among sovereigns that we rate.

“These scores are much higher than ‘Baa’ category medians, outperforming them in all aspects except for regulatory quality, and reaffirming that the Bahamas’ strong institutional framework provides key support for the country’s ratings,” Moody’s added.

“In addition, we think the Central Bank of the Bahamas’ policy credibility is high, which supports confidence in the currency peg to the US dollar and contributes to maintaining macroeconomic stability.”

When it came to improvements in the Bahamas’ ‘Baa2’ sovereign credit rating, which is two notches above so-called ‘junk’ status, Moody’s said everything hinges on improved economic growth and fiscal consolidation.

“Given the significant deterioration in fiscal strength experienced by the Government of the Bahamas, upward ratings momentum would only emerge should its debt metrics fall to levels close to those of similarly rated peers,” the rating agency emphasised.

“A reduction of contingent liabilities stemming from loss-making public sector corporations would also be credit positive.”

As for a downgrade, Moody’s added: “Downward pressure on the Bahamas’ rating could arise if the economy underperformed and negatively impacted government revenues, thus complicating the fiscal consolidation process.

“An expansion of public spending that would hinder consolidation efforts would also be credit negative.

“In addition, the crystallisation of contingent liabilities from debt held by public sector corporations that required government intervention would result in a loss of creditworthiness for the sovereign.”

Moody’s, though, hinted that a downgrade for the Bahamas - at least by itself - is unlikely in the short-term.

“The stable outlook reflects Moody’s expectation that the medium-term fiscal consolidation plan will contain the Government’s debt burden in fiscal 2015-2016, and afterwards lead to a gradual reduction in the debt-to-GDP ratio,” it added.

“The rating outlook also envisages that real GDP growth will strengthen somewhat after 2015.”

Comments

Economist 8 years, 7 months ago

The last third of the article sums it all up. We all know that the government does not have the will to do what Moody says is necessary sooooo down grade here we come.

John 8 years, 7 months ago

More small and medium businesses have folded and gone under in the Bahamas in the last 3 - 4 years, probably than any other time in recent history of the Bahamas. The reason being that despite the high cost and great risk and low profitability of these companies doing business, government sought to tighten the screws on them, increase taxes and put more operating restrictions. This is being done in the middle of a long and persistent recession, when government should, instead, be throwing these businesses a life line. Yet unemployment remains in double digits. Will it be too late before government realizes it cannot tax itself into prosperity. The amount of taxes it has burdened these businesses with is unbearable and the VAT revenue which it is now collecting and bragging about is unsustainable. Most of it is due to double taxation. A quart of mayonnaise cost $6, a gallon of milk $9 and a 12 once of locally produced water is selling in the airport for $4.32. MY GOD!

John 8 years, 7 months ago

Many businesses are finding out that, after a year of VAT returns, they are unable to cover their overhead, less see a profit. This is because of the illusive, if not deceptive way the VAT is calculated. While most businesses calculate their markup on the first cost of goods, government calculates the VAT at the border on all costs incurred on a product. Freight, insurance, customs duties etc. This may actually be 10 -18% of the first cost of the product. So while the government told businesses there was no need to increase their prices, businesses who did their markup on first cost could have been giving 3 - 10.5% of their gross profit to the government in the form of VAT returns. In addition because VAT is paid at the boarder the cost of inventory has also increased as has the cost of shrinkage due to theft, spoilage and product obsolescence. Then when you add the increases in business licence fees, minimum wage increases and the associated increase in national insurance, businesses that did not increase their prices upward by 15 - 30% either spent the entire year working for government (no profit) or gave most of their profit to the government. So while the government can brag about the large windfall they saw in VAT revenue, many businesses are trying to figure out what happened to their profit.

sheeprunner12 8 years, 7 months ago

Our economy benefits certain special interests .......... politically connected, foreign investors, old white elite ..................... that is 3-5% of the population that lives off the sweat of the others.

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