The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas will suffer another credit rating downgrade within the next six-nine months unless it “follows through” on Value-Added Tax (VAT) or some other structural revenue reform following the 2014-2015 Budget.

Dr Lisa Schineller, Standard & Poor’s (S&P) senior country analyst for the Bahamas, yesterday told Tribune Business that the upcoming May Budget had to include the Government’s plans for generating medium and long-term “revenue buoyancy”.

Suggesting that the national debate over VAT, and whether this is the best tax reform option, needed to be concluded relatively swiftly, Dr Schineller said S&P needed to “see something move on the revenue side this [fiscal] year”.

Emphasising that it was not S&P’s job to tell the Bahamas whether VAT was the ‘best fit’ or not, the analyst said she would also be assessing whether the revenue-raising measures included in the 2013-2014 Budget had generated the projected extra $100 million.

Dr Schineller said “execution” was key for the Government, and its medium-term reform plans both needed to be spelled out and acted upon “within this fiscal year”.

Acknowledging that the Government had shown “some commitment” to curtailing spending, which was projected to come in $162 million lower than projected for the 2012-2013 fiscal year, Dr Schineller said that despite this the fiscal deficit “remains high”.

The Christie administration is projecting that the GFS fiscal deficit (new debt) for 2013-2014 will still total $443 million, and the S&P analyst said this showed the existence of structural fiscal imbalances that needed to be corrected sooner rather than later.

“We need to see something move on the revenue side over the course of this year,” Dr Schineller told Tribune Business.

“There’s some evidence of a commitment there [on spending], but you’ve got to bring buoyancy to the revenue side notwithstanding. We’ll be looking at how the discussions plays out, and what happens next year.”

Dr Schineller was speaking after she and S&P assigned a ‘BBB’ rating to the Bahamas’ upcoming US$300 million, senior unsecured 10-year bond issue.

That is the same rating as the one the Wall Street agency has assigned to the Bahamas’ sovereign debt, meaning the $300 million issue has been rated ‘investment grade’ - a welcome signal to send to global capital markets investors.

Dr Schineller said the $300 million bond was now being ‘priced’, in terms of its interest coupon, with the Government deciding to tap the international markets to bolster foreign currency reserves now standing at $685 million.

“My understanding is that they were pricing some time this week,” she told Tribune Business.

However, Dr Schineller’s comments highlight just how the Government has its ‘back to the wall’ on turning around its fiscal position, particularly the growth in the fiscal deficit and national debt-to-GDP (gross domestic product ratio).

While the private sector and many consumers are calling for it to “slow down” its VAT implementation drive, and look at alternative tax reforms, the Christie administration is under increasing international pressure to hit its July 1, 2014, target.

Apart from the International Monetary Fund (IMF) and the Wall Street credit raring agencies, it is also being forced to move rapidly on tax/fiscal reform by the Bahamas’ impending commitments related to full World Trade Organisation (WTO) membership, which will inevitably entail cutting/eliminating import tariffs.

And, in rating the Government’s imminent $300 million bond issue, S&P added: “We could lower our rating on the Bahamas by one or two notches if the administration does not take additional steps to reduce the Bahamas’ fiscal deficit and arrest the increase in debt-to-GDP over the next several years. Passage, and successful implementation, of a revenue-positive VAT could be such a step.

“Conversely, we could revise the rating outlook to stable if the Bahamas implements effective tax reform, or if the island’s new tourism offering produces greater economic growth with more positive fiscal and external spillovers than we currently expect.”

“We need to see some follow through for next year,” Dr Schineller reiterated to Tribune Business. “It’s execution.

“We’ll see a blend on the revenue side and expenditure side; a commitment to contain, rationalise in various areas of government, coupled with what they’ve put in place on the revenue side.”

Implying that it was all well and good for the private sector, and Bahamians in general, to debate the merits of VAT and various tax reform options, Dr Schineller said this did little to combat high fiscal deficits despite the Government holding the line on recurrent (fixed cost) spending in real terms.

While the Government did not necessarily have to hit its July 1 implementation date for VAT, she added that some kind of revenue raising/tax reform measure needed to be included in the 2014-2015 Budget to avoid a sovereign rating downgrade.

“Tax reform is the key,” Dr Schineller told Tribune Business. “We’re not saying it has to be VAT; that’s not our role.

“A longstanding constraint on the [Bahamas’ sovereign] rating has been the narrow revenue base and decline in revenue. The system, there’s no buoyancy there. You need to be looking at the revenue base in a more structural manner.

“The key element is what is the plan and the timeframe. The Government has highlighted July 1, and we need something that’s going to be incorporated in the Budget,” she added.

“It’s not our job to say it has to be July 1, but measures need to be taken within this fiscal year.

“We had measures in this Budget and it will be important to see the execution on both the expenditure and revenue side. But then there’s the bigger picture - medium term on the revenue side. We need to have more clarity on that in the next fiscal year, assuming nothing happens to offset that; real, positive moves on the growth side.”

A further cut in the Bahamas’ sovereign credit rating would negatively impact its creditworthiness, hurting its ability to access international capital markets and borrow at favourable interest rates.

It would also send a bad signal to the world that could impact foreign direct investment (FDI) inflows into the Bahamas, damaging the real economy.

The Government is seeking an extra $500 million in annual revenues by the 2016-2017 fiscal year, in a bid to run recurrent surpluses (revenues will exceed its fixed costs). Some $200 million of that is projected to come from VAT.