The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government is over-estimating its revenues for the 2014-2015 fiscal year by more than $60 million, a rating agency yesterday warning that the Bahamas’ creditworthiness will be subject to continued “downward pressure” for the next 12-18 months.

Moody’s, in its assessment of the Christie administration’s Budget, said lingering “uncertainties” over the Bahamian economy’s strength, plus the Government’s ability to implement its reform plans, called into question whether it would achieve its fiscal targets.

While agreeing that the Government’s medium-term plans could cut the fiscal deficit and “stabilise” the rate of national debt growth, Moody’s noted that the Bahamas was among the most debt-burdened of the countries that enjoy its ‘Baa’ investment grade rating.

And, backing the position adopted by the Coalition for Responsible Taxation and others in the Bahamas, the rating agency warned the Government that spending containment was “key to ensuring fiscal sustainability”.

In what was effectively a ‘mixed bag’ assessment, as far as the Government is concerned, Moody’s reiterated a common theme - that its revenue estimate are too optimistic.

The Government is projecting a fiscal year-over-year increase in its income that is equivalent to 2.7 percentage points of gross domestic product (GDP).

It is estimating that revenues will grow from the equivalent of 17.1 per cent of GDP in 2013-2014 to 19.8 per cent in the upcoming fiscal year - a $305 million increase to $1.77 billion.

Yet Moody’s yesterday said it is estimating that the Government’s revenues will increase by the equivalent of two percentage points of GDP - 0.7 percentage points less than the Christie administration’s projections.

Tribune Business calculations, based on the $8.932 billion GDP projection contained in the Budget, show that a two percentage point increase will generate total revenues of $1.706 billion - some $64 million below the Government’s own estimates.

If such an undershoot occurs, the Government’s projected deficit might hit $350 million or 3.9 per cent of GDP, rather than the projected $286 million or 3.2 per cent.

“The Government has also proposed additional revenue measures, including the strengthening of tax collection practices,” Moody’s said yesterday.

“Combined with the VAT tax, we expect these measures will increase revenues by about two percentage points of GDP in 2014-15 relative to the prior fiscal year, somewhat lower than the Government’s forecast, which envisions an increase of 2.7 per cent of GDP.”

The Government is projecting that the bulk of the $305 million revenue increase will come from VAT’s $150 million half-year contribution. The balance is forecast to largely come from Customs and Excise Taxes, plus real property tax, even though there is limited economic growth.

Moody’s, though, gave the Government a better ‘vote of confidence’ when it came to its medium-term fiscal projections.

It said that if the Government’s fiscal reform plan was properly implemented, revenues would rise to three percentage points above the past decade’s 16.7 per cent of GDP average - “in line” with the Christie administration’s expectations.

But analyst Renzo Marino, in the report to investors, warned: “There are several risks to achieving these levels of revenue improvement. First, there are the downside risks stemming from the challenge of implementing the new VAT tax.

“In addition, because the Bahamas continues to pursue negotiations with the World Trade Organisation (WTO), the Government also faces prospects of lower revenues from a reduction in imports tariffs.

“Given that a significant proportion of the Bahamas’ revenues comes from levies on imports (46 per cent of the total on average for the 2008-2012 period), the Government would need to compensate for the reduction of tariffs with additional measures.”

That, as financial secretary John Rolle has indicated, will likely mean an increase in the VAT rate to compensate for the reduced border tax earnings.

Moody’s, meanwhile, said the Government’s expenditure restraint plans could reduce spending as a GDP percentage from a 24.3 per cent high in 2011-2012 to 21 per cent by 2016-2017 - the latter figure just above the 20.1 per cent average for the decade leading to 2012-2013.

Yet it warned: “The willingness and ability of the Government to contain the growth of expenditures will be key to ensure fiscal sustainability.

“Should the Government be able to fully implement its plans, we estimate the fiscal deficit could fall to around 1 per cent of GDP over the coming years. This in turn would contribute to the stabilisation of the debt ratio, which is set to peak above 60 per cent of GDP.”

Moody’s added that the “doubling” in the Bahamas’ debt-to-GDP ratio to 61.8 per cent over the past eight years “weighs significantly” on the Bahamas’ creditworthiness.

And the rating agency noted that economic growth, an area where the Bahamas has been weak in previous years, would be key to the fiscal recovery. The 15 per cent unemployment rate, though, would hit both consumer spending and income from VAT.

“The economic outlook will also be a key determinant.....,” Moody’s said. “Following four years of subdued growth of only 1.1 per cent on average between 2010 and 2013, we expect the Bahamas’ economy to accelerate to rates closer to the pre-crisis averages, which were on the order of 2-3 per cent annually.

“However, the Bahamas’ high unemployment rate, which stands above 15 per cent, will likely limit domestic private consumption and could also limit the income from the VAT tax.”

Comparing the Bahamas to its fellow ‘Baa’ rated countries, Moody’s said its debt-to-GDP ratio was 20 percentage points higher than the ‘median’ in its class, with only India and Brazil close to this nation’s level.

The Bahamas’ debt servicing burden was also “double” the median for the ‘Baa’ category, with only four out of 29 nations - Brazil, India, Costa Rica and the Philippines - suffering from higher interest payments to revenues ratios.

Moody’s, too, suggested that the US monetary easing and likely higher interest rates internationally would continue to pressure the Bahamas’ debt servicing costs.

While backing the Government’s fiscal plans as “credit positive” and potentially placing the country’s finances “on a more sustainable path”, Moody’s summed up: “Several factors would need to fall into place to arrest the upward trend in government debt-to-GDP.

“The tax reform will be key to ensuring the expansion of the Government’s revenue base, given that the current tariff-based model is set to change radically as the Bahamas’ accession to the WTO is likely to be completed in the coming years.

“Furthermore, the performance of the economy would have to report material improvement since prolonged weakness in growth would not only reduce future revenue streams, but could also add demands on the Government to spend more than it currently contemplates under the budget plan.

“Given these uncertainties, we believe the potential for downward pressure on the Bahamas’ sovereign rating is likely to remain present over the next 12 to 18 months.”