The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas was last night said to have “escaped another bullet” after Standard & Poor’s (S&P) chose not to further downgrade this nation’s sovereign credit rating, with successful fiscal reform key to any improvement.

The Wall Street credit rating agency, in confirming that the Bahamas’ sovereign credit rating remained at ‘BBB/A-2’, albeit with a ‘negative’ outlook, warned that further downgrades would follow if the Christie administration failed to arrest this nation’s $443 million fiscal deficit and expanding national debt.

“We could lower our rating on the Bahamas by one or two notches if the administration does not take additional action to reduce the Bahamas’ fiscal deficit and arrest the increase in debt-to-GDP over the next several years,” S&P said last night.

It added that the “passage and successful implementation of a revenue-positive VAT” would be a key step in addressing the Bahamas’ deficit/debt woes.

And S&P revealed that the Government was aiming to bring the final version of its VAT legislation to Parliament by December, passing it into law by early 2014.

“Currently in a period of public consultation, the Government expects to send a final VAT legislation to Parliament in December for passage by early 2014,” the Wall Street rating agency said.

“Preparations for a July 1, 2014, implementation are underway within the Government.”

This indicates that the private sector, and Bahamian public at large, will have less than two months to analyse VAT and its implications for them before the new tax becomes law.

Although its report is based on information obtained during its visit to the Bahamas in August, S&P will likely have kept in touch with the situation on the ground, and updated its report.

Either way, S&P said VAT and wider revenue reforms, together with the $2.6 billion Baha Mar project, were vital to the Bahamas’ prospects of improving its sovereign credit rating.

“We could revise the rating outlook to stable with effective tax reform, or if the island’s new tourism offering produces greater economic growth with more positive fiscal and external spillovers than we currently expect,” S&P added.

In effect, S&P’s release backs the Government’s stance that fiscal reform is a must, and that eliminating structural imbalances in the public finances is inescapable if the Bahamas is to avoid further sovereign credit rating downgrades.

While S&P’s ‘no action’ announcement comes as little surprise, given that it last year indicated no further downgrades were likely for a year or two, it hints at the scenario outlined by the Ministry of Finance’s financial secretary, John Rolle.

Mr Rolle, in recent presentations on VAT, warned that if the Bahamas’ ever-increasing debt-to-GDP ratio, and almost $5.5 billion national debt, were not addressed quickly and set on a downward path, further rating downgrades would follow.

Contacted by Tribune Business last night, the Financial Secretary agreed that the Government had to “deliver” on its fiscal reform efforts for the Bahamas’ sovereign credit rating to improve.

“I wish it could have been positive or stable,” Mr Rolle said of S&P’s outlook for the Bahamas, “but we have to deliver for that to change.”

Chester Cooper, the Bahamas Chamber of Commerce and Employers Confederation’s (BCCEC), agreed that while the S&P report showed “doing nothing on tax reform is not an option”, it was important to get the change right first time.

“This is positive news to the extent that the Government has escaped another bullet by avoiding another downgrade,” Mr Cooper told Tribune Business of S&P’s release.

“This reaffirms my position on tax reform, which asserts that doing nothing is not an option. However, as important it is to get tax reform done, it’s as important to get it right, lest we find ourselves in the activity trap of tax reform over the next several years.”

Acknowledging the private sector’s concern, Mr Cooper added: “A significant percentage of the business community is in fear of VAT. Much of this fear is as a result of the unknown. We therefore urge the Government to release the draft legislation, and draft regulations, to allow more meaningful debate on the details.

“Doing nothing as we have done for many decades is not an option. Hand in hand with tax reform, the Government must demonstrate the will to reduce waste, cut their suit to fit the cloth, demonstrate responsible spending and demonstrate their plan and ability to manage - and administrate - any new form of taxation in a cost effective and efficient manner.

“The pain of change will be for naught if we continue to spend every new dollar collected in an inefficient administration and bureaucratic practices. Not enough is being said on this point.”

The S&P report picked up on the business community’s VAT concerns, stating: “Many in the private sector express reservations about their own readiness for implementation, in addition to complaints about the VAT reform itself.

“In our view, passage of a VAT reform that yields important new revenue, coupled with expenditure constraint, could stem the rise in the general government debt trajectory and improve the Bahamas’ fiscal indicators.”

Mr Cooper, meanwhile, said Prime Minister Perry Christie had promised to meet with the BCCEC’s Coalition for Responsible Taxation soon, even as it continued to work with the Ministry of Finance’s technical teams.

And the ‘Chamber on the Move’ programme, which is intended to visit the Family Islands and various communities to brief them on VAT and the BCCEC’s mentorship initiatives, will also launch soon.

“The Coalition is committed to continuing to work with the Government to get tax reform right,” Mr Cooper said.

“This is not about us and them. This is about protecting the fiscal integrity of the Bahamas and creating a win-win. I reiterate that we must get this right the first time.”

The Ministry of Finance issued a relatively bland statement in response to the S&P release, saying it merely “underscores the importance of continuing with credible reforms to improve the health of public finances, and to begin to reduce the public debt burden over the next few years”.

It also focused on the rating agency’s praise for the Government’s spending containment, and added: “The Ministry of Finance agrees with the rating agency’s view that expenditure discipline has to be maintained over the coming years, and that this must complement a medium-term strategy to improve revenue collections.

“The broad package of revenue and expenditure reforms, and a concerted focus on boosting investor confidence in the medium-term stability of the Bahamian economy, is vital to sustaining growth creating employment.”