The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

MOODY'S has given the Government’s fiscal consolidation campaign a major boost by predicting that this year’s fiscal deficit will only narrowly overshoot its target by $44m.

The credit rating agency, in its latest update on The Bahamas released on Friday, forecast that improved revenues and “spending restraint” will contain the deficit for the 2023-2024 fiscal year to a sum equivalent to just 1.2 percent of economic output of gross domestic product (GDP).

If Moody’s projection turns out to be accurate, the GFS deficit will be only slightly higher than the $131m, or 0.9 percent of GDP, that the Davis administration targeted when unveiling its Budget last May. The rating agency’s latest 1.2 percent deficit forecast, based on that Budget, is equal to $174.67m or a near-$44m overshoot if it holds and comes true.

And Moody’s also shrugged off the fact that the Government’s fiscal deficit, which measures by how much its spending exceeds revenue and further grows the $11.5bn national debt, was almost double the full-year target at $258.7m half-way through the 2023-2024 Budget year. Despite the excessive ‘red ink’, it asserts that there are “signs of fiscal consolidation”.

“According to data as of the first six months of the fiscal [year 2023-]2024, The Bahamas recorded a fiscal deficit equal to $258.7m or 1.9 percent of its GDP,” Moody’s said in its credit update. “Even though the deficit exceeded the target for the first six months of the fiscal year, there were signs of fiscal consolidation.

“We expect improvement in revenue collection and continued restraint on spending will allow the Government to come close to the annual target of 0.9 percent of GDP. We forecast a slightly larger deficit in fiscal 2024 — 1.2 percent of GDP — reflecting moderate slippage vis-à-vis the Government’s fiscal targets.”

The Davis administration will likely seize on Moody’s update as the first affirmation from an external source that it will close to achieving its projected fiscal targets, especially as the rating agency is forecasting it will achieve its long-cherished goal of moving from deficit to a Budget surplus equal to 0.5 percent of GDP (around $65.5m) in the upcoming 2024-2025 fiscal year.

It is unclear what Moody’s is basing its deficit forecast on as the basis for its calculations was not included in the credit update. To achieve its 1.2 percent forecast, the Government would have to generate an $83.7m Budget surplus over the six months from January to end-June 2024 and partially offset the first-deficit.

The Government’s fiscal year is cyclical in nature, with the bulk of its revenues earned during the first four months of the calendar year that coincide with peak winter tourism, Business Licence fee collection and the bulk of real property tax payments. During the prior 2022-2023 fiscal year, it ran a collective surplus of just over $30m for this period.

However, this was more than cancelled out by the $290m in deficits incurred for May and June 2023, as this is typically when spending spikes as ministries, departments and agencies present bills for payment that the Ministry of Finance new nothing about. This usually wipes out any early calendar year surplus.

Moody’s is bucking a trend which has seen the likes of the International Monetary Fund (IMF) and Standard & Poor’s (S&P) both predict that the 2023-2024 deficit will overshoot its target by nine-figure sums. “Government fiscal performance through the first half of the fiscal year demonstrates a narrowing fiscal deficit,” it said, although the $258.7m outcome was only slightly less than the prior year’s $275m deficit.

The IMF, in its contrasting statement in the annual 2023 Article IV consultation with The Bahamas, estimated that the current fiscal year’s deficit will be “considerably larger than that expected in the Budget” at a sum equal to 2.6 percent of gross domestic product (GDP).

This is almost triple the Davis administration’s forecast of a deficit equivalent to 0.9 percent of GDP or total Bahamian economic output. The IMF’s prediction, if accurate, would mean that the GFS deficit - which measures by how much government spending exceeds its revenue income - would balloon to around $378.73m compared to the Government’s $131.1m forecast.

S&P is forecasting a deficit - which measures by how much the Government’s spending exceeds its income in any fiscal year - of 3.2 percent of GDP, which is equivalent to $466m - almost $100m higher than that forecast by the IMF

And the IDB, in a paper tackling the doubling of its crisis funding facility for The Bahamas to $200m, estimated that “the fiscal deficit will be at around 3 percent of GDP in fiscal year 2023 and around 2 percent in fiscal year 2024”. The latter figure would peg the deficit, based on the Government’s GDP Budget estimates, at around $290m.

Several sources spoken to by Tribune Business yesterday voiced surprise at Moody’s assessment and projections, adding that all signs suggested that the Government’s deficit is moving up rather than down. They declined to comment, though, until the rating agency disclosed the basis of its findings.

The Government, and Ministry of Finance, have yet to release any figures on its fiscal performance since the end-December mid-point of the 2023-2024 Budget. The monthly details for January and February 2024 are now late, and it is unclear if Moody’s analysis may have been influenced by having sight of these reports as well as figures for March. If they were strong, the Government would likely have disclosed them.

Moody’s, meanwhile, suggested that tourism growth will slow in 2024 following the post-COVID rebound’s completion. “According to The Bahamas National Statistical Institute’s advanced estimate for 2023 real GDP, the economy expanded 2.6 percent year-over-year,” the rating agency said.

“Most industries recorded growth in 2023, with accommodation and food services, and construction, expanding 26 percent and 22 percent, respectively, in 2023. Stopover arrivals, which tend to spend more than cruise shop visitors, increased 17 percent year-over-year in 2023, reaching about 95 percent of 2019 levels in terms of stayover arrivals.

“Cruise ship arrivals increased 44 percent year-over-year in 2023, and are about 50 percent above 2019 levels. Tourism output remained strong in early 2024. However, we expect a moderation in growth in tourism value-added in 2024 to contribute to slower real GDP growth.”

Elsewhere, Moody’s said the interest rate attached to the Government’s $500m foreign currency loan in January 2024 was relatively high even with the benefit of the partial Inter-American Development Bank (IDB) guarantee. The initial 8.6 percent rate was close to the 8.95 percent coupon attached to the $600m bond placed by the Government at the COVID pandemic’s peak in 2020.

“The Government has managed to maintain sufficient broad access to funding to meet its large gross borrowing requirements, which we estimate to be around 15 percent of GDP in fiscal 2024,” Moody’s said. “In January 2024, the Government secured a $500m foreign currency loan, benefiting from a first-loss guarantee from the Inter-American Development Bank (IDB).

“The cost of borrowing, even with the IDB guarantee, was 8.6 percent for the first interest period, higher than the weighted average interest rate on The Bahamas’ external bonds and external loans, which were 7.17 percent and 5.6 percent, respectively, as of the end of fiscal 2023.

“The loan is a floating rate loan priced with a spread of 3.45 percent above the Secured Overnight Financing Rate. By January 2024, the Government had successfully met 75 percent of its external gross financing needs for fiscal year 2024.”