The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The “enclave” nature of large-scale Bahamian resorts is limiting their impact on the rest of the economy, a leading Wall Street analyst believes, with the ‘jury still out’ on whether Baha Mar will grow or split the high-end visitor market come 2015.

Providing further insight into his and Moody’s decision to downgrade the Bahamas’ sovereign credit rating, Edward Al-Hussainy said increased stopover tourist arrivals had to “translate into growth”.

Noting that tourism spending and per capita visitor yields remained depressed in both the Bahamas and the wider Caribbean, Mr Al-Hussainy added that it was vital for industry growth that Baha Mar filled its additional 2,300 room inventory when it came online in 2014.

And the Moody’s analyst warned that unless the Bahamas produced a “concrete plan” to get its fiscal house in order within the next 12-18 months, or recurrent revenues enjoyed a sharp recovery, a further credit rating downgrade would likely be in the offing.

Pointing out that, historically, countries under a ‘negative’ Wall Street outlook - as the Bahamas is - have a ‘one in three’ chance of suffering a rating downgrade, Mr Al-Hussainy indicated that Moody’s will be looking for the Government to set out specific steps and timelines for bringing the fiscal deficit and debt-to-GDP ratios under control in the Mid-Term Budget and/or 2013-2014 Budget statement.

The Christie administration last week indicated its intention to do just that, but the Moody’s analyst said the Bahamas “needs something to happen sooner” than Baha Mar to get the other key variable - the economy and private sector - growing.

And while its financial position meant the Government could do less itself to stimulate economic growth via capital works, Mr Al-Hussainy added that the Bahamas was largely at the mercy of external events.

He said the Government was also “in risky territory” in guaranteeing the debt for, and subsidising, multiple public corporations to the tune of millions of dollars annually. This acted as a further “drag” on the fiscal position.

Still, on the positive side, Mr Al-Hussainy noted that the Bahamas ‘Baa1’ credit rating was better than Brazil’s, and last week’s downgrade was just one of many in the Caribbean over the past 18 months.

Asked what Moody’s wanted to see the Bahamas do to avert a further sovereign downgrade, Mr Al-Hussainy told Tribune Business: “In a broad sense, it’s really a lot of revenue side initiatives.

“We have maintained a negative outlook, and looking forward over the course of the next year, what we’re going to be looking at is: Is the revenue side going to improve, or are we going to see a concrete plan to get revenues up?”

The Christie administration has largely put its faith in tax reform, and the introduction of a Value-Added Tax (VAT), although both Moody’s and Standard & Poor’s (S&P) believe this will only have an impact in the medium-term. It has also focused on better administration and enforcement of the existing tax system, as opposed to new or increased taxes.

Mr Al-Hussainy added that the other key factor for fiscal improvement was Bahamian GDP growth. “Here the Government has fewer levers at its disposal,” he acknowledged.

“It’s done a fair bit of spending on capital projects already. It’s a matter of whether they feed into growth over the next year.”

Tourism’s performance is vital to the Bahamian economy given that it accounts for over 50-60 per cent of GDP and employment. Yet Mr Al-Hussainy said the ‘campus’ nature of many resorts was weakening the ‘trickle down’ economic impact the hotel industry had for other Bahamian industries and businesses.

“A lot of the large-scale tourism projects are very much externally funded” he told Tribune Business. “These are very much enclave projects, so their linkages to the rest of the economy have weakened over time, and they import a lot of their stuff.”

The $2.6 billion Baha Mar redevelopment at Cable Beach, for instance, was importing much of the raw materials and labour from China. Noting that the project was bringing “a lot of new capacity online, which is good in terms of tourism product development”, Mr Al-Hussainy added: “To have growth we’re going to have to see capacity filled and revenues going up.”

Hotel rates across the Bahamas and Caribbean were being “severely discounted”, the Moody’s analyst adding: “So even though we’re seeing increases in the numbers relative to the Bahamas and the Caribbean, revenues have not gone up broadly.”

And, speaking to the ‘gamble’ the Bahamas has taken with Baha Mar, Mr Al-Hussainy told Tribune Business: “Baha Mar will cannibalise a lot of the capacity being filled at Atlantis and the other resorts. The net effect [of Baha Mar] is still a little bit up in the air. We need to see these tourism numbers translate into growth.”

Whether Baha Mar ‘grows the pie’ for high-end tourists with Atlantis, or ends up ‘splitting’ the market and leaving both properties worse off, will only be answered come 2015. Mr Al-Hussainy admitted that the answer largely depended on the strength of the US and world economies, “over which the Bahamas has no control”.

While there were plenty of developments in the Bahamian economy besides Baha Mar, the Moody’s analyst told Tribune Business: “What we’re trying to see is: Is all that going to yield growth?

“Is it going to yield dynamism in the business environment? Is unemployment going to come down? That’s going to be a key metric. Baha Mar is a big part of this, but it’s going to happen in 2015. The Bahamas needs something to happen sooner than that.”

Asked how long Moody’s was giving the Bahamas to show it was serious in turning around a record $550 million deficit, and national debt approaching $5 billion, Mr Al-Hussainy indicated this nation had a 12-18 month window in which to show “some concrete progress”.

He explained: “It’s really early in the game. What we try to signal with the negative outlook is that the risks are tilted to the downside. Historically, countries that have a negative outlook have a one-in-three chance of being downgraded.

“For the Bahamas, what we’ve said is this. We need to see some improvement in the Government’s fiscal numbers to stabilise the rating. That’s why the outlook’s in place for 12-18 months. If, in this space of time, we don’t see a bit of momentum [towards a turnaround], it’s likely a downgrade becomes a reality.”

Mr Al-Hussainy said Wall Street would be scrutinising the upcoming Mid-Year and 2013-2014 Budgets to see if they contained the “concrete” signs it was looking for. And, with the US still facing the so-called ‘fiscal cliff’, he added: “Anything that affects recovery in the US impacts the Bahamas; there’s no getting away from that.”

Another key challenge, Mr Al-Hussainy said, was the Government’s contingent liabilities. These already amount to around $560 million, a sum equivalent to 7 per cent of GDP, and are largely made up of debt the Government has had to guarantee on behalf of its various Corporations and agencies.

The fear here is that the Government may have to do much more of this, especially given the cash-strapped Bahamas Electricity Corporation’s (BEC) precarious financial situation. Not to mention the around $60 million worth of subsidies that annually go to the Hotel Corporation, Broadcasting Corporation of the Bahamas, Bahamasair and the Water & Sewerage Corporation (the latter two sucking up $40-$50 million of that sum).

“That’s a big ticket item for sure,” Mr Al-Hussainy told Tribune Business. “The contingent liabilities can come on to the Government’s balance sheet at any time.

“That’s risky territory. It’s always risky territory when you start guaranteeing the debt of the public corporations. That’s the space they’re in. It’s difficult to see the Government not supporting these public corporations, but it becomes a drag. If you’re Budgeting to support those corporations next year, that makes your job much harder.”

Mr Al-Hussainy said it was positive that much of the Government’s increased spending had been on capital works and infrastructure, as opposed to wages and fixed costs. He described it as a medium-term investment, the question being when it started to yield benefits.

And, providing some solace for the Bahamas’ loss of its ‘A3’ rating, the Moody’s analyst told Tribune Business of the new ‘Baa1’ grade: “The rating is on par with Mexico. It’s higher than the rating for Brazil. In the region it’s on a par with Trinidad & Tobago, the difference being that Trinidad has the oil revenues, keeping its outlook stable.

“Almost all the other credit ratings we’ve looked at in the Caribbean in the last year and a half have seen a downgrade or outlook change from ‘stable’ to ‘negative’, so this is very much part of the downward movement in the region.”