The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas’ fiscal deficits for the two upcoming Budget years will be double what the Government is projecting, with Moody’s branding its consolidation targets as “hard to achieve” due to the weak economy.

The Wall Street credit rating agency, in a full analysis of the Bahamian economy and the Government’s finances, said this nation’s debt-to-GDP ratio would peak later - and at a higher level - than the Christie administration’s forecasts.

And for three consecutive years - from this Budget year until 2016-2017 - the fiscal deficit will be around $100 million or more higher than the Government’s own predictions.

The Moody’s report, released on September 12 in the wake of its decision to downgrade the Bahamas’ credit rating by a further notch, said this nation’s debt-to-GDP ratio would “increase to over 62 per cent” and stabilise at this level “through 2016-2017”.

This compared to the Government’s own projections that the debt-to-GDP ratio will reach a 60.9 per cent summit this budget year, with Moody’s attributing the difference to its prediction that the Bahamas’ fiscal turnaround will take longer to materialise.

“In our view, the ambitious consolidation path detailed in the Government’s medium-term plan will be hard to achieve given the still subdued economic environment,” Moody’s said.

“Consequently, we expect that the fiscal deficit will narrow over the coming years, but at a moderate pace.”

As a result, the Wall Street credit rating agency is predicting that the Bahamas will still run much higher fiscal deficits than government projections over the next three years - despite the introduction of Value-Added Tax (VAT) and other revenue/spending measures.

For the current 2014-2015 fiscal year, Moody’s is forecasting that the GFS fiscal deficit will be equivalent to 4.3 per cent of GDP or $384 million, compared to the Government’s own 3.2 per cent of GDP or $286 million estimate.

This means that the Bahamas’ fiscal deficit, using a GFS measurement that strips out debt principal redemption, will be almost $100 million higher than the Government is projecting this fiscal year.

Moody’s is forecasting a similar trend over the following two fiscal years. For the 2015-2016 fiscal year, it believes the GFS deficit will come in at 2.7 per cent of GDP or $250.8 million, compared to the Government’s own 1.4 per cent or $129 million estimate.

This is a $121 million difference, and this gap will increase in 2016-2017 if Moody’s predictions come true. The rating agency is forecasting that the Government’s fiscal deficit, while continuing to fall, will still be equivalent to 2.2 per cent of GDP or $212.52 million.

This is more than double the Government’s own deficit estimate of $84 million, or 0.8 per cent of GDP - an almost $130 million gap between the two forecasts.

Robert Myers, the Coalition for Responsible Taxation’s co-chair, yesterday said he favoured Moody’s debt estimates over the Government’s forecasts.

And he reiterated previous calls for a ‘cap’ to be imposed on the Bahamas’ debt-to-GDP, arguing that setting a ‘maximum ceiling’ above which a government could not easily go would provide the necessary fiscal discipline.

“I’d be inclined to go more with Moody’s than the Government’s projections, because we’ve not seen the kind of fiscal responsibility we’ve needed to evidence to-date,” Mr Myers told Tribune Business.

“There are those within the Ministry of Finance doing a great job, need to be commended and must continue doing what they’re doing.

“But it’s not enough across the board,” Mr Myers added. “They’ve got to control spending, and have to have caps on debt-to-GDP. We’re not going to correct these problems unless we learn to be disciplined.”

The Moody’s country analysis, like its recent rating downgrade, is a ‘bittersweet’ document that contains both ‘positives’ and ‘negatives’ for the Bahamas.

For, despite describing the Government’s fiscal reform plans as ‘overambitious’, the Wall Street agency said they would ultimately achieve their objective of stabilising the debt-to-GDP ratio and lowering (possibly eliminating) the fiscal deficit.

Moody’s also backed the Government’s decision to go with a lower rate, 7.5 per cent VAT with fewer exemptions, as this would spur greater private sector compliance and lower administrative costs.

“The commitment demonstrated by authorities to tackle these challenges head-on is credit positive,” Moody’s said.

“Additionally, notwithstanding the pace of consolidation, we expect that the fiscal measures will contribute to the stabilisation of the debt trajectory........

“When the authorities first presented the VAT issue to the public for discussion last year, a start date of 1 July, 2014, and a rate of 15 per cent were considered. At a lower rate, authorities will now allow for significantly fewer exemptions, which should facilitate compliance and lower administrative costs for contributors.”

Moody’s said the Government believed net revenues derived from VAT would equal 3 per cent of GDP - around $240-$270 million - in a full fiscal year.

With VAT only implemented for the 2014-2015 fiscal year’s second half, the new tax is set to account for 1.5 per cent of a projected 2.7 per cent increase in total government revenues.

“We expect that implementation risks from the introduction of a new collection measure will lead to revenue underperformance in the first year,” Moodys’ warned.

“However, considering the experience of other Caribbean nations that introduced a VAT, we expect that fiscal revenues will increase over the long term as the VAT is an effective instrument for raising revenue.

“According to a study by the IMF, in the Caribbean, on average, one percentage point of a VAT rate collects about 0.5 per cent of GDP and is less distortive than other taxes.”

While the Government appears solely focused on VAT and revenue-raising measures, Moody’s echoed private sector and public concerns by warning: “Expenditure restraint will be key to reversing the deterioration of the fiscal accounts.”

Noting that government spending as a percentage of GDP had risen in recent years, the rating agency added: “High spending on social transfers and increased budgetary support to public-sector corporations have increased expenditures. The unemployment rate remains high, making reducing social transfers difficult.

“Meanwhile, although we expect that capital expenditure will fall to around 3 per cent of GDP by 2016-2017, from 4.4 per cent in 2012-2013, the rise in interest payments will likely diminish the net impact of this reduction.”

Moody’s said the Government’s debt servicing (interest) costs had increased to 15 per cent of its revenues last year, compared to less than 10 per cent in 2008, “suggesting a somewhat limited fiscal space” for the Bahamas compared to similarly-rated countries.

“Compounded with low economic growth, which led to falling revenue, an increase in government expenditure has contributed to the deterioration of the fiscal accounts,” Moody’s added.