The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Moody's has warned the Government it will be "difficult" to slash the fiscal deficit to 1.1 per cent of GDP by 2019-2020, unless it achieves faster economic growth or alters policy.

The rating agency, unveiling its rationale for placing the Bahamas' sovereign creditworthiness under a 'downgrade review', suggested that the fiscal consolidation estimates unveiled by the Minnis administration in the 2017-2018 Budget are "optimistic" and may be hard to achieve.

Its July 7 'credit opinion' confirmed that the review, which could lead to a second 'junk' downgrade for the Bahamas within eight months if Moody's follows through, was sparked by the dramatically revised fiscal projections unveiled by the new government.

Apart from the Minnis administration's $722 million borrowing forecast, Moody's said also focused on the $500 million deficit projected for 2016-2017 - a figure that represented a $150 million increase on the estimate given by the Christie government's mid-year Budget just two months prior.

"The decision to place the ratings on review was prompted by official statements that the Bahamas' fiscal position was weaker than previously estimated, and that the Government's debt ratios will continue to worsen over the coming years," Moody's said.

"This diverged from our previous expectation that the Government's debt ratios would stabilise in fiscal 2017, which had supported the Bahamas' 'Baa3' rating and its previously stable outlook."

Moody's statement made clear that the Minnis administration has its work cut out to regain trust and credibility in the accuracy of the Government's Budgetary and fiscal projections.

"The Budget indicated the Bahamas' fiscal outlook is significantly worse than what we had previously incorporated into our projections," the rating agency said, acknowledging the impact from Hurricane Matthew. "However, the FNM has also considered revenue underperformance and expenditure slippage under the PLP administration.

"Consequently, the new government now expects the deficit in fiscal 2017 to reach $500 million (5.5 per cent of GDP). This contrasts with the PLP's mid-year performance report, presented in March, which estimated a deficit of $350 million (3.8 per cent of GDP), and an estimated deficit of $100 million (1.1 per cent of GDP) in the original fiscal 2017 Budget."

Tribune Business reported on the "wild, huge" swings between the two administrations' projections when the 2017-2018 Budget was presented, noting that the nine-figure gap between them threatened to undermine business, investor and consumer confidence unless the differences were properly explained.

As an example, the new government revealed that the 2017-2018 deficit is projected to be $323 million - an almost $300 million increase from the $28 million in 'red ink' that was forecast by the Christie administration just 12 months before.

Moody's, not surprisingly, also picked up on this. "The FNM government's Budget statement also envisions a somewhat optimistic deficit reduction path through fiscal 2020 without material changes to current policy, particularly in a still weak economic environment," it added.

"The new government forecasts a deficit of $322 million (3.4 per cent of GDP) in fiscal 2018, and deficits of around 2.3 per cent of GDP in fiscal 2019 and 1.1 per cent of GDP in fiscal 2020. This compares with previous official estimates of a small deficit of $28 million (0.3 per cent of GDP) in fiscal 2018, and surpluses beginning in fiscal 2019.

"Given the economy's still weak state, we consider that these estimates may be optimistic. While the introduction of a Value-Added Tax has contributed significantly to bolstering the government's revenue base, important challenges remain to rein in expenditures. The Bahamas' susceptibility to climate-related events such as hurricanes, as was the case in 2015 and 2016, also increases the risks of fiscal slippage."

Moody's, though, described the Minnis administration's decision to "delay the implementation" of promised tax breaks as "a positive note". Apart from exempting so-called 'breadbasket' food items, electricity, water, healthcare and education from VAT, the FNM had also promised 'tax-free zones' to revive Over-the-Hill and inner-city members.

While the Government had promised a fiscal consolidation plan within three months, Moody's suggested that both revenue and spending pressures would create headwinds pushing back against it.

"The weakness of the economy is likely to weigh on revenue growth over the coming years," the rating agency said. "The FNM has also stated it will likely focus on reducing spending. However, there will be some sources of upward pressure on spending as well, such as the ongoing introduction of a National Health Insurance scheme and contingent liabilities/additional spending stemming from state owned enterprises."

K P Turnquest, minister of finance, said state-owned enterprises (SOEs) will eat up a collective $429 million in subsidies in the 2017-2018 fiscal year. Almost half this sum will go to the Public Hospitals Authority (PHA), with other perennial loss-makers such as Bahamasair, ZNS and the Water & Sewerage Corporation also eating up multi-million dollar subventions.

Moody's indicated that the Government's plans to address the SOEs, and the drain they impose on the Public Treasury, will be a key factor in its downgrade review. Around $450-$500 million of debt owed by these entities, equivalent to 9 per cent of GDP, is guaranteed by the taxpayer.

"Moody's will assess measures to address the rising sovereign risk posed by contingent liabilities stemming from the broader non-financial public sector, with a stock of debt representing over 17 per cent of GDP, of which about half carries an explicit government guarantee," the rating agency said.

With the Bahamas clinging to its 'investment grade' rating by one notch, Moody's said it had also been alarmed by the new government's forecast that the debt-to-GDP ratio will continue to increase.

"The review will focus on assessing the likelihood of stabilisation of the Government's debt ratios over the coming years," it added. "According to updated fiscal estimates presented by the newly inaugurated administration in the 2017-2018 Budget, due to costs associated with Hurricane Matthew and additional fiscal slippage during the election year, the Government's fiscal position has worsened further.

"The Bahamas' government debt-to-GDP ratio has risen to an estimated 72 per cent of GDP in 2016-2017, from 55 per cent in 2012-2013. This is higher than Moody's previous expectation that the debt ratio would stabilise below 70 per cent of GDP, given a recovering, albeit still weak, economy. This anticipated stabilisation supported the stable outlook on the Bahamas' 'Baa3 rating, placed in August 2016."

Underscoring how the Bahamas' economic and fiscal strength has deteriorated, Moody's said this nation's economy contracted by an average of -0.2 per cent between 2013 and 2017. Out of countries with a similar credit rating, only Trinidad & Tobago has performed as poorly.

With the Bahamas' direct government debt-to-GDP ratio at 71.8 per cent, and guaranteed debt taking this above 80 per cent, Moody's said this nation's fiscal indicators were much weaker than other 'Baa3' rated countries.

"In terms of the interest-to-revenue ratio, the Bahamas at 15.2 per cent is almost double the Baa median (7.9 per cent) and that of Baa3-Ba2 peers (8 per cent)," Moody's added.

The rating agency indicated that the Bahamas could retain its 'investment grade' rating if it could show "economic trends and the Government's policy response support a stabilisation of the debt trend". If not, 'junk' status will follow.

Just as Standard & Poor's (S&P) gave the Bahamas such an unwelcome 2016 Christmas present , Moody's announcement is akin to an ill-timed Independence Day 'gift' from this nation's perspective.