The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THERE is “at least a one in three chance” that Standard & Poor’s (S&P) will downgrade the Bahamas’ sovereign credit rating within the next 24 months, with Wall Street ruling tax reform out as a major difference maker in the short-term.

Lisa Schineller, S&P’s senior analyst for the Bahamas, in a video message explaining why the credit rating agency last week altered its outlook on this nation from ‘stable’ to ‘negative’, said fiscal deficits were set to remain “higher than anticipated” in the short-term at least.

“We believe there is at least a one in three chance of lowering the rating in the next 24 months,” Ms Schineller said at the start of the three-minute video clip on the Bahamas, which has been viewed by Tribune Business.

Striking a slightly more gloomy tone than S&P’s written explanation for its actions, Ms Schineller has effectively given the Christie administration a two-year window in which to develop - and implement - a credible plan to set the Government’s finances back on a sustainable path.

In reality, her comments mean that the Government will likely have to outline its short and medium-term plans for achieving this by May 2013 at latest, when the 2013-2014 Budget is due to be presented to Parliament. S&P, and probably the rest of Wall Street, will then want to assess over the following fiscal year whether the Bahamas is living up to its commitments and succesfully implementing them.

What is clear, though, is that S&P has less than 100 per cent confidence in the Bahamas’ ability to stave off a further downgrade to its sovereign credit rating. Ms Schineller’s remarks put this nation’s chances of doing so at 66 per cent, at best, and probably no better than 50/50.

And, apart from ruling out tax reform as a near-term difference maker, Ms Schineller also hinted that the Government was not being “proactive” enough in tackling its growing financial problems. The fiscal deficit, projected at $550 million for the 2012-2013 fiscal year, and debt-to-GDP ratio of above 60 per cent, must first have their growth rates halted before being set back on a sustainable path.

“We have observed a continued deterioration in the Bahamas’ fiscal stance during the fiscal year ended on June 30, 2012,” Ms Schineller said in the video clip. “The Government’s deficit, instead of having peaked and started a slow downward trend, rose even further in the year ended June 2012.”

While acknowledging cost overruns on capital expenditure, largely ‘code speak’ for the extra $93 million spent on the New Providence Road Improvement Project, Ms Schineller said the $504 million deficit projected for 2011-2012 had also been fuelled by “sluggish growth in recurrent revenue”.

“The PLP sees little room to make large near-term adjustments,” Ms Schineller said, although she noted its public pledges to set the Government’s finances back on a sustainable path.

The Government is making much of its efforts at tax reform, telling Tribune Business a White Paper on its proposals should be released for public discussion this month. Michael Halkitis, minister of state for finance, indicated the issue was one of four key planks for fiscal reform, but S&P is clearly attaching less importance to it - at least in the short-term.

This is because reforms, and potentially a completely new tax structure, will take several years to implement - too long to make a near-term difference, especially given the 24-month window S&P has set.

“A reform to broaden the tax base would seemingly take several years to conceptualise, review and implement,” Ms Schineller said. “In the interim, deficits are likely to remain at higher than anticipated levels.

“The negative outlook reflects the possibility of a downgrade if the PLP government does not support medium-term policies to address the higher deficits and stem the rise in its debt-to-GDP, which absent fiscal measures or a sharp increase in economic growth projections, is likely.”

The International Monetary Fund (IMF) has projected that the Bahamian economy’s GDP will grow at 2.5 per cent in both 2012 and 2013, but whether this is fast enough to make a significant dent in both the fiscal deficit and debt ratio is debatable.

The Government appears to be pinning a lot of its hopes on increased economic growth, with a revived private sector driving increased revenues, but a lot of eggs seem to be in the proverbial Baha Mar basket. Ms Schineller’s comments, too, indicate that Wall Street believes the overall economy will not grow fast enough to alleviate the Bahamas’ fiscal woes.

“A weakness in our current assessment of the Bahamas’ generally strong commitment to delivering sustainable public finances and economic growth is what could lead to a downgrade,” Ms Schineller added in her concluding remarks.

“The rating could stabilise at the current level if the Government takes a more proactive approach to stabilising debt levels or the current economic prospects improve.”

With economic growth seemingly unable to do the trick, it appears that the Christie administration will either have to increase revenues, reduce public spending or employ a combination of both. Neither option is appealing, as the former would hurt consumers and a still-struggling private sector, possibly retarding the economy further, while spending cuts raise the spectre of public service lay-offs.

But, if the Government chooses to heed the S&P warning and wants to avoid a downgrade to its sovereign rating, it is probable that Bahamians will have to brace for a another round of new or increased taxes - possibly as early as the 2013-2014 Budget.

The good news for the Bahamas last week was that S&P only changed its outlook, meaning it believes the risks facing this nation’s finances are weighted towards the downside. It has effectively fired a ‘warning shot across the bows’, giving the Bahamas a window of opportunity to get its house in order.

S&P and its fellow traveller, Moody’s, assess the creditworthiness of countries and their ability to repay their debts. The sovereign credit rating is the main indicator they use, and a downgrade indicates they have become more gloomy on a nation’s fiscal affairs.

A downgrade also indicates that the risk of lending to a particular country has increased, so any further cut to the Bahamas’ rating would see this nation’s borrowing costs on the international markets increase. And, with investors demanding more compensation for the extra risk associated with lending to the Bahamas, precious taxpayer funds would be sucked away from areas such as education, health and crime fighting.

The latest fiscal figures, contained in the prospectus for the Government’s last $100 million Registered Stock issue, make grim reading.

Even excluding debt principal repayment, it is running an almost-$143 million recurrent deficit, with estimated revenues of $1.536 billion dwarfed by $1.679 billion in recurrent spending for the 2012-2013 fiscal year.

And that is before some $358 million worth of capital spending, which does not even include advances to public corporations, enters the equation. The total national debt is expected to exceed $5 billion by next year.

S&P last week forecast forecast that the Bahamas’ net government debt would hit 45-47 per cent of GDP by 2013-2014, a double digit rise in three years. It added that the 2011-2012 fiscal deficit, at over 7 per cent of GDP, was set to be followed by one that hit 6.7 per cent.

The Government’s annual debt interest burden now stands at 13 per cent of total revenues, but S&P acknowledged that the debt principal and interest burden was mitigated to some extent by the fact that 80 per cent was held by Bahamas-based creditors.