The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Wall Street believes the Government’s plan to balance its Budget by 2016-2017 is “overly optimistic”, as it requires an “unprecedented” positive swing of almost $400 million on the primary side alone.

Giving further insight into the reasons behind its recent decision to downgrade the Bahamas’ sovereign credit rating, Moody’s said the Christie administration’s fiscal forecasts were based on GDP growth rates, and debt servicing costs, that were “too favourable” given historical trends.

Also providing an insight into the Government’s own thinking, the Wall Street credit rating agency said the ‘balanced Budget’ plan was based on the Bahamian economy achieving a nominal average GDP growth rate of 3.5 per cent per annum between now and the 2016-2017 fiscal year.

This, Moody’s said, was a full percentage point higher than the 2.5 per cent nominal average GDP growth rate achieved between 2010-2012.

And the Wall Street rating agency added that the Christie administration was also banking on “effective” interest rates on its debt of 4.3 per cent - a servicing cost much lower than the 5.2 per cent average that the Bahamas’ sovereign debt attracted between 2006 and 2011.

Indeed, Moody’s said the effective interest rate on government debt had averaged 5.5 per cent from 2005-2012 - more than one percentage point higher than the Christie administration’s target.

Unless the Government knows something the rest of the Bahamas does not, it appears that it is almost ‘betting the house’ on the $2.6 billion Baha Mar project driving renewed economic growth and, by extension, increased tax revenues.

Indeed, Moody’s indicated that the Christie administration is projecting that it will achieve a primary budget surplus of 1 per cent in 2015, followed by an even greater surplus - equivalent to 2.4 per cent of GDP - in 2016.

A primary surplus means that the Government’s recurrent tax/fee revenues exceed its recurrent (fixed) costs, such as the public sector wage bill and rents. Yet Moody’s said achieving the Christie administration’s primary budget surplus targets would require “an unprecedented correction”.

In its full country analysis on the Bahamas, which has been obtained by Tribune Business, Moody’s said: “Government forecasts contemplate that a balanced Budget will be achieved by the fiscal year 2016-2017 through a combination of lower current and capital expenditures, and improved revenue mobilisation, primarily through higher property tax yields.

“In our view, these projections are too optimistic. Primary balance surplus targets of 1 per cent in 2015, and 2.4 per cent in 2016, would require an unprecedented correction. During the last 10 years, a primary surplus was only reported once; in 2011, thanks to non-recurrent privatisation [BTC] receipts.”

Moody’s would only reveal the Government’s fiscal plans and projections if it had been informed of these by the Christie administration itself. It is likely this occurred during the rating agency’s recent visit to Nassau, when it would have met with the Ministry of Finance and other senior officials.

Eyebrows are likely to be raised in some quarters that the Government divulged all this information to Wall Street first, rather than telling the Bahamian people, who it will rely on to get itself out of this financial mess. Presumably the Government will provide more details to its citizens at the upcoming Mid-Year Budget.

Questions are also likely to be asked about the GDP growth projections, given the Bahamian economy’s recent sluggish performance, and estimates of lower interest rates. The latter flies in the face of the recent Moody’s and Standard & Poor’s downgrades, which lowered the Government’s creditworthiness and imply that the risk of lending to it has increased.

Moody’s also provided an explanation for the recent 200-500 per cent increases in many residents’ real property tax bills.

It revealed that the Christie administration is also banking, as part of its ‘balanced Budget’ calculations, on “significant improvement in property tax revenues to 2 per cent of GDP in 2016, from 1.4 per cent in 2012”.

This falls into line with previous comments by Michael Halkitis, minister of state for finance, who said that with better administration and enforcement, the Government had been advised it could double annual real property tax revenues from around $92 million to almost $200 million.

The Moody’s note backs up this element as being central to government thinking, the rating agency adding that the Christie administration is projecting a nominal compound annual growth rate (CAGR) of 11.3 per cent for real property tax revenues between 2012-2016.

Moody’s again indicated it believes this forecast too optimistic, as the CAGR for real property tax revenues between 2006-2011 was just 3.1 per cent. Nevertheless, it explains why the Real Property Tax Office is pushing so hard.

Indicating what it considered to be a more realistic GDP growth scenario for the Bahamas, Moody’s said: “Assuming GDP growth of 1 per cent going forward - average growth between 2005-2012 was 0.5 per cent - a primary balance surplus of 0.8 per cent of GDP will be required to stabilise the debt ratio.”

It described this as “a significant correction from the primary deficit of 3.8 per cent forecast for 2013, and a deviation from the average deficit of 1.2 per cent recorded between 2005-2012”.

In other words, the Government would need to achieve a positive correction equivalent to 4.6 per cent of GDP - almost 5 per cent - from the current situation to get on the path set by Moody’s.

Given that Bahamian GDP is estimated at $8 billion (Moody’s pegged it at $7.8 billion), then the Bahamas would need an improvement in the region of $360-$400 million on the primary budget to set the fiscal deficit and debt-to-GDP ratio back on to a sustainable path.

Noting the Bahamas’ relatively low inflation rate, the Wall Street rating agency added: “These dynamics highlight the scope of the fiscal consolidation necessary to reverse the upward debt trajectory. As a result, we expect the Government debt burden to grow.

“Given weak growth prospects and continued fiscal pressures, we anticipate a slow but steady build-up in debt over the course of the next two-three years. The sustainability of the debt profile will primarily depend on the Government’s success in expanding the revenue base, which we view as unlikely.”

The ‘wild card’ here, and something that did not get much attention from the Moody’s analysis, was the timing of any tax reform. The report did note: “Since reforms necessary to increase revenues - creation of a Value-Added Tax, modernising property taxes, reducing tax concessions granted to foreign-owned tourism projects - will not be implemented before 2014-2015, the Government’s balance will likely continue to deteriorate.”

The Government’s ambition of achieving a balanced Budget in 2016-2017 is also likely to be greeted with some scepticism locally, given that this fiscal year will coincide with what is, in all probability, a general election. Traditionally, governments have loosened the purse strings, and increased both spending and deficits during such years in a bid to secure votes.

Just for good measure, Moody’s reiterated: “While the Government envisions that tighter spending and higher revenues will balance the Budget by fiscal year 2016, this is overly optimistic in our opinion, given weak growth prospects, structural spending rigidities and rising debt servicing costs.”