The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas has a “six month window” in which to stave off another credit rating downgrade through concrete fiscal reform actions, with Moody’s yesterday describing the Government’s planned $800 million correction as “enormous”.

Aaron Freedman, the Moody’s vice-president who led its recent Bahamas country report, described as “pretty drastic” the Christie administration’s goal of increasing revenues by a sum equivalent to 10 per cent of national gross domestic product (GDP).

He and his colleagues put the scale of the Government’s proposed fiscal turnaround into context by telling Tribune Business most countries sought revenue increases equal to 2-3 per cent of net GDP from fiscal reforms.

The Bahamas, though, is targeting a gross revenue increase up to five times’ that amount, with $500 million in new income adding to the estimated $300 million in existing import tariffs that it must replace.

Value-Added Tax (VAT) is projected to generate $500 million of that $800 million, or just over 60 per cent, but Mr Freedman said Moody’s was “sceptical” the new tax would meet the Government’s forecast.

Unaware that the VAT legislation has yet to reach Parliament, until informed by this newspaper yesterday, Mr Freedman and his team said it was likely this would be “watered down” by public opposition to the new tax.

And, while acknowledging that the $2.6 billion Baha Mar project gave the Bahamas something no other Caribbean nation had, the Moody’s executive said its success was “a big if”.

Pointing out that the Bahamas was now in the final third of the 12-18 month “window” allowed by the negative outlook Moody’s imposed on this nation in December 2012, Mr Freedman said it was “accurate” to suggest this nation’s creditworthiness would be slashed again if there was no follow through on fiscal reform commitments.

“I would expect some time within the next six months - it could be on the shorter end of that, it could be on the longer end of that - we’re going to make some decision on what to do with the rating,” Mr Freedman told Tribune Business.

“It’s a fairly short window to see some development if, in fact, we were to stabilise the rating.”

This implies that Moody’s, like Standard & Poor’s (S&P), wants to see actual execution/implementation of the Government’s fiscal reform plans by mid-summer.

This means the Christie administration will have to introduce VAT, or some alternative, by its July 1 target deadline if the Government is to avoid another sovereign credit rating downgrade.

It has only the mid-year Budget and 2014-2015 Budget between now and then to affirm its plans, with the situation illustrating just why it is pushing so hard on VAT and fiscal reform, given that the Wall Street rating agencies are at its back.

Mr Freedman, meanwhile, said Moody’s had no “preferences” as to the type of tax reform ultimately introduced by the Bahamas, or whether this nation addressed its fiscal situation at all.

Yet he warned that a failure to tackle the fiscal deficit and national debt, or implement VAT or some alternative, would have “negative implications” for the Bahamas’ credit rating.

“Right now it appears VAT is the most viable proposal to consolidate the Government’s finances, stabilise or reduce the level at which the debt is increasing,” Mr Freedman said.

“If VAT is not approved, and no alternative is put in place, that will have negative implications for the rating.”

The Moody’s team had expected the VAT legislation to reach Parliament in December and be approved by 2013 year-end, with the final version key to determining how much money the Government is likely to raise.

“Our sense is that we’re sceptical the VAT will have the net impact on revenues the Government has forecast,” Mr Freedman told Tribune Business.

The Government is projecting that VAT will earn it a gross $500-$530 million, and produce a net $200 million annual revenue increase by itself.

Yet Petar Atanasov, a Moody’s associate analyst who worked on the Bahamas’ report, said the private sector/public opposition to VAT might blunt its impact by forcing the Government to grant more exemptions and zero ratings, thereby narrowing the tax base.

“There’s quite a significant backlash against VAT by the population and business community, so we think if the legislation passes it will probably be a bit watered down compared to the initial draft,
 Mr Atanasov said.

“That might be why the VAT impact is not as strong as government first indicated.”

And Mauro Leos, another Moody’s vice-president, said increasing government revenues by equivalent to 2 percentage points of GDP was considered a “significant improvement” for most countries.

Nations that “push it” could sometimes see a net revenue improvement equal to 4-5 per cent of GDP, yet this paled against the $800 million that the Bahamas was seeking - a figure equivalent to around 10 per cent of GDP.

“That is, safe to say, enormous,” Mr Freedman told Tribune Business. “It’s unusual for governments to have such a drastic overhaul of their tax structure, which is what the Bahamas is proposing.

“Any time you’re talking about putting in place 10 per cent of GDP with new taxes, that’s pretty drastic.”

Mr Freedman added that the ‘economic growth’ side of the equation could not be forgotten in the fiscal reform effort, especially since the Government was counting on this for an extra $100 million in revenues.

While the Bahamas had outperformed most of the Caribbean in recent years, Mr Freedman described its GDP growth performance as “lacklustre”.

Moody’s is projecting the Bahamian economy will grow by 2-2.2 per cent in 2013 and 2014, and Mr Freedman said: “Any time you increase government revenues, you have fiscal consolidation of the scale the Bahamas is currently contemplating, that is going to have a contractionary impact on the economy.”

That will likely add to local fears that VAT will further depress the Bahamas’ economic growth. Mr Freedman, too, expressed concerns that it might further erode the competitiveness of an already high-cost tourism product.

“There are other economic developments that should hopefully be enough to offset the impact of fiscal consolidation,” Mr Freedman added, referring to Baha Mar.

“If that’s successful, that will have a positive offsetting impact. In our view, it’s a big if, as the net impact the project will have on the tourism sector and economy as a whole is uncertain.”

He acknowledged that Baha Mar ‘splitting’, rather than growing, the high-end visitor market with Atlantis remained Moody’s key concern.

“They vehemently dispute that contention. We’ll see what happens,” Mr Freedman said.

And he warned that the Bahamas could be trapped in a “vicious cycle” if it delayed fiscal reforms, or failed to achieve high enough growth rates.

The slower the pace of fiscal consolidation, the higher the national debt would go, Mr Freedman warned, and the resulting higher interest rate costs would make reducing it even harder.

“From our perspective, the question will be whether there is enough growth to shrink and reduce these debt levels,” Mr Freedman said.

“Faster growth would facilitate that. With lower growth, it becomes more challenging, and the Government has to rely more on fiscal consolidation, and that has a further negative impact on the economy. So you have another cyclical event going on.”