The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas is unlikely to stabilize its national debt before the 2016-2017 fiscal year, a Wall Street credit rating agency also warning that the proposed Value-Added Tax (VAT) may “become politically contentious and difficult to implement”.

Moody’s latest assessment of the Bahamas’ short-term fiscal prospects places it somewhat at odds with the Government’s Mid-Year Budget projections, which clearly show consolidation starting in the 2014-2015 fiscal year via a fiscal deficit that is slashed by more than two GDP percentage points.

Indeed, the Christie administration’s forecasts identify the 2015-2016 fiscal year as when the full impact begins to come through. The GFS fiscal deficit (which strips out debt principal repayments) is projected to be zero, with the central government debt-to-GDP ratio declining from 56.8 per cent to 54.3 per cent.

Moody’s, though, is less optimistic. It told investors in a Friday credit opinion on the Bahamas: “We see limited prospects for the fiscal consolidation necessary to strengthen the Government’s balance sheet and stabilize debt levels in the next two-three years.”

That takes the Bahamas through the 2015-2016 fiscal years, and the credit rating agency added: “The Bahamas has a limited revenue base, and the Government relies disproportionately on volatile trade-related tax revenue and property taxes. Revenue-side reforms will be a key to ingredient to improving the ratings outlook.

“We expect the Government to find it difficult to rationalize spending and achieve the fiscal consolidation necessary to stabilize the debt and place it on a sustainable trajectory.”

The centrepiece of the Government’s revenue reforms is the planned introduction of a 15 per cent VAT come July 1, 2014. While backing the Christie administration’s choice as “less distortive” than other options, Moody’s warned that VAT may become “politically contentious and difficult to implement”.

It agreed, though, with Michael Halkitis, minister of state for finance, in that VAT would be ‘revenue neutral’ for the first one to two years of its existence. Mr Halkitis had previously said as much to Tribune Business, indicating that the Government initially projected VAT revenues as equivalent to 2 per cent of GDP. That would total around $160 million, enough to cover the $130-$140 million in annual revenues the Government is relinquishing by giving up Business Licence fees and hotel occupancy taxes.

But, with services included in the VAT tax base, Moody’s estimated that the new tax would generate revenues equivalent to 6 per cent of GDP by 2016 – a sum equivalent to anywhere between $480-$600 million. It will need to, if it is to be a suitable replacement for the current import duty-dependent regime.

Elsewhere, Moody’s for the first time expressed concern that the “crystallization” of contingent liabilities built up by loss-making state Corporations, especially BEC, could harm the Government’s credit rating.

And it pointed out that any firm economic benefits from oil exploration in Bahamian waters were “in the most optimistic scenario, years away”. In other words, the Bahamas cannot count on this to solve its fiscal problems any time soon.

“The crystallisation of contingent liabilities from debt held by public sector corporations, such as the loss-making Bahamas Electricity Corporation, could adversely affect the rating,” Moody’s warned.

“In March, the Government announced plans to open offshore territory to oil and gas exploration in advance of a referendum on commercializing and potential discoveries. However, concrete economic benefits, in the form of foreign investment and fiscal revenues from the energy sector are, in the most optimistic scenario, years away.”

“The negative rating outlook reflects our expectation that the Government will find it difficult to achieve the fiscal consolidation necessary to stabilize the debt and place it on a sustainable trajectory in the near term,” Moody’s added.

“Revenue-side reform, as well as a rationalization of recurrent expenditure, will be key ingredients to improving the ratings outlook. While the pace of increase in government debt ratios is likely to slow in the coming years, a failure to reverse the recent trend of rising debt will place downward pressure on the Bahamas’ rating.

“In the meantime, the Government financial deficit continues to widen, financed primarily by short-term domestic borrowing, and we expect this pace to accelerate as the Government increases capital spending to support several resort developments and social spending on programmes such as the mortgage support plan.”

Expenditure growth, the credit rating agency added, had continued following the May 2012 general election. This had left the Government playing “an increasingly dominant role in the economy” through increased capital spending, social security payouts and public sector employment, and increased transfers to public sector corporations.

The central government’s debt-to-GDP ratio had risen by more than 23 percentage points in a five-year period, from 31.7 per cent in 2007 to 54 per cent last year. “Foreign currency debt, which accounts for 56 per cent of total government debt, is on the rise as well, albeit at a slower pace,” Moody’s said.

“However, average maturity on foreign currency debt is around 14.4 years, which limits rollover risk. The combination of historically high debt levels and large fiscal deficits has left the Government with limited fiscal buffers to effect further stimulus or respond to external shocks.

Apart from the Government executing properly on its planned revenue reforms, and reining in spending, Moody’s said the other key to resolving the Bahamas’ fiscal problems was generating economic growth. The still-struggling US economy will also have a part to play.