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FDI fear on latest S&P downgrade

* Economist: Investors likely to seek greater concessions

* Rating agency says Bahamian economy to shrink 21%

* Questions local institution 'appetite' for more Gov't debt

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

An economist last night warned that investors will likely seek greater tax breaks and concessions as a result of The Bahamas' latest sovereign credit downgrade.

Rupert Pinder, who lectures at the University of The Bahamas (UoB), told Tribune Business that foreign direct investment (FDI) projects and their sponsors would seek greater compensation for this nation's higher "country risk" as a result of Standard & Poor's (S&P) downgrading its sovereign credit to 'BB-' from 'BB'.

The move, which pushes The Bahamas deeper into so-called "junk" territory, was based on the country's limited "fiscal flexibility" due to reforms being too slow prior to the COVID-19 pandemic, combined with the near-total eight month shutdown of the tourism industry and loss of key foreign exchange earnings.

S&P said the immediate economic outlook for The Bahamas had further worsened, with gross domestic product (GDP) for 2020 now projected to shrink by 21 percent - a loss of more than $2bn compared to 2018's real GDP figure of $10.763bn.

Revealing that Bahamian GDP growth per person will, thanks to COVID-19, be -0.11 percent over a 10-year period, S&P also questioned whether prudential/regulatory limits - as well as "appetite" - would inhibit institutional investors such as banks, insurance companies and pension funds from buying into the remaining $400m debt the Government plans to issue this fiscal year.

The rating agency also suggested the Government's willingness to undertake fiscal reforms, and raise revenues through new and/or increased taxes, was likely to be constrained by a desire to let the economy recover from COVID-19's ravages and the upcoming general election in 2022.

And Mr Pinder also warned that the latest in a series of downgrades by S&P and its fellow traveller, Moody's, will also have implications for the foreign direct investment (FDI) which the Government-appointed Economic Recovery Committee (ERC) made a priority for the country to attract and offset the loss of tourism.

While arguing that The Bahamas remains "an attractive place to invest", Mr Pinder added: "What you are going to find happening as a result of this downgrade is that investors will say to you there is greater country risk. Therefore, they will be looking for a higher level of return, and those higher returns will come by way of their ability to lower their cost of investing.

"And that will come through putting pressure on you in terms of subsidies. It does factor into the risk profile of the country."

S&P, justifying its latest action, said: "The country's fiscal measures have evolved slowly, and we expect the pandemic will hinder meaningful public finance reform, while large fiscal deficits and a high debt burden increase funding pressures.

"The dramatic decline in tourism is having a major impact on The Bahamas' economy and government finances that is larger than anticipated." S&P maintained its 'negative' outlook on The Bahamas on the basis that there was "at least a one-in-three chance" that another downgrade will occur next year.

It warned this would occur "if the economic recovery in 2021 is weaker, or more prolonged, than our base case due to challenges related to COVID-19 containment measures or a longer-term fall in tourism". Persistently high fiscal deficits at the present level, difficulties encountered by the Government in obtaining financing and an inability to address "weak public finances" are other factors in the mix.

"The Bahamas entered the pandemic with little fiscal flexibility owing to its sustained budgetary imbalances and high debt burden," S&P said. "Although successive administrations have identified the need to reform the country's finances, reforms have been slow and failed to eliminate fiscal deficits.

"The failure to implement timely fiscal reform and strengthen public sector finances has meant the country has limited liquid financial assets to deploy during the pandemic. At the same time, The Bahamas faces financing risks as it seeks to fund large pandemic-related fiscal deficits and refinance existing debt.

"We have lowered our institutional assessment of The Bahamas due to the political challenge of addressing shortcomings in public finances in an uncertain economic climate over the next one-two years."

As for the real economy, S&P added: "COVID-19 has triggered an economic shock that is more pronounced in tourism-dependent countries like The Bahamas. The country's important tourism sector was shut down in March. Although it has since slowly reopened, arrival levels remain dramatically lower than usual.

"The loss of tourism revenue worsens an already-strained external position. At the same time, a high debt burden limits the country's fiscal flexibility, while the currency regime limits monetary policy flexibility. We believe the economic impact of the pandemic remains a considerable risk to The Bahamas. Consequently, we have maintained our negative outlook."

S&P's assessment did not appear to factor in the recently-announced December re-openings for Atlantis and Baha Mar, and the collective return to work of 4,500 employees. It added: "Since our review in April, we have revised our economic growth expectations for The Bahamas, and now believe that the economy will contract 21 percent in 2020, before a more gradual recovery begins in 2021.

"Although we believe it will take several years for nominal GDP to reach pre-pandemic levels, the country will benefit from its strong marketing presence and easy access for visitors from its main source market, the US.

"We expect 2020 GDP per capita will be $28,400, and the weighted-average real GDP per capita trend growth over a 10-year period will be negative 0.11 percent, which is below that of sovereigns in the same GDP category."

Noting that the Government had suspended the targets set out in the Fiscal Responsibility Act following Hurricane Dorian, S&P added that it was working on policies and legislation to support this goal rather than implementing "material revenue measures or sustained expenditure cuts".

"Moreover, the current economic environment and upcoming election in 2021 [2022] make difficult fiscal reforms unlikely in the short term," the rating agency said. "The ongoing delays and failure to advance reform in key sectors of the economy will make it more challenging for the Government to finance larger fiscal deficits and promote balanced economic growth over the longer term."

While backing the Government's projected $1.3bn deficit projection for the 2020-2021 fiscal year, S&P added: "We believe the weak economy could limit the government's ability and willingness to raise revenues through additional tax measures.

"The fiscal deficits will propel the Government's net debt burden to about 69.5 percent of GDP by the end of 2021, while interest payments will remain above 15 percent of government revenues for three or more years.

"We expect The Bahamas will finance its deficit with a combination of domestic and external borrowing. In the past few years, most government borrowing has been from domestic institutions. However, commercial banks' exposure to the public sector is now close to 20 percent of their assets and they might have less ability or appetite to absorb additional exposure."

The Ministry of Finance, responding to S&P's action, last night issued a statement saying the Government was "weighing policy options" based on how tourism performs between now and year-end, although the rest of the release bore little relation to this.

Acknowledging that the decline in tourism earnings, due to the sector's longer-than-expected shutdown amid COVID-19 lockdowns and curfews, the Ministry said this had resulted in "larger than expected deviations from established fiscal targets".

K Peter Turnquest, deputy prime minister and minister of finance, said: "The Government remains committed to meaningful public finance reform. We have accelerated our legislative reforms to strengthen the country’s fiscal framework, and we are following through on structural reforms in the coming months to significantly strengthen accountability and transparency in fiscal and procurement matters.

"We cannot forget that the Bahamian economy is experiencing unprecedented shocks from two catastrophic external events. Nevertheless, we remain confident in the economy’s ability to rebound and our commitment to restoring fiscal balance over time.

“The Bahamas’ vulnerability to severe external shocks has been apparent throughout this crisis, but we are in the same boat as most countries around the world. It remains to be seen just how deep and prolonged the impact of this economic crisis will be. The Government is taking proactive and prudent steps to meet its obligations and to plan for the recovery."

Comments

benniesun 3 years, 12 months ago

Reposts;

*The politicians elected by the Bahamian population reflect the composition of our population. The low intellect, hatred of excellence, hubris and avarice of the politicians reflect those same qualities of the general population.

ignorant: Destitute of knowledge, either in general or with respect to a particular fact or subject

naïve: lack of sophistication or worldliness - not knowing what's going on

stupid: slow of mind, unimaginative, obtuse, insensitive

trusting: If you trust someone, you believe that they are honest and sincere and will not deliberately do anything to harm you.

The Bahamas' economy is fubared and we are living on what is left of the fat that was put on. The system is rigged against us. Look at Haiti and the African countries; we are under the same system. We have produced persons who are selfish and uncaring traitors.

Grifters make a simple process seem very complex and confusing - it is an art.*

In essence, for 98% of us, the situation will be dire for many years to come. Even those who think that their substantial savings will save them are wrong, as the world currencies are forecast-ed to be depreciated as worldwide lockdowns escalate. We have sold ourselves, citizenship and our country; now we are about to reap the consequences of our ill thought out selfish actions.

tribanon 3 years, 12 months ago

Minnis and K P Turnquest never should have spent all of our VAT dollars on growing the size of the public service in their effort to 'buy' votes, rather than paydown the level of our national debt as they promised they would do.

Those at the apex of the corrupt political ruling elite in our country, whether of the FNM or PLP persuasion, have accumulated and hold astonishing wealth outside of The Bahamas as a result of decades of heavily padded construction contracts involving their cronies and corrupt foreign direct investment (FDI) deals involving greedy unscrupulous foreign investors, with their silent Bahamian partners, getting enormous unnecessary concessions that never should have been given in exchange for government approvals of all kinds of development projects that were so clearly contrary to the interests of the Bahamian people and our country as a whole.

BahamaPundit 3 years, 12 months ago

It appears every deal entered by our Government is a deal in a deal. There is the outside, public deal that slants highly in favor of the foreign investor and the inside, private deal that wires straight to politicians' and cronies' bank accounts. This deal in deal manner of operating craters the public treasury. No country can sustain such a duplicitous system for long before complete collapse occurs.

birdiestrachan 3 years, 12 months ago

and in spite of all the downgrades. The Government is busy playing Santa Clause,

Money . Grants. side walks. giving away money like candy.

Bahama7 3 years, 12 months ago

Let’s hope we find some oil... and lots of it.

tribanon 3 years, 12 months ago

You're delusional. BPC is nothing but a UK based scamming operation designed to transfer money from dumb gullible investors into the pockets of a small group of shysters. And to think PricewaterhouseCoopers in the UK has allowed its name to be associated with BPC. What a joke!

tetelestai 3 years, 12 months ago

Auditors are no better than lawyers or politicians. For someone who tries to make everyone think that your ignorant self is the smartest person in the room, I thought that you knew that already.

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