The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

While praising the Government for “outperforming” its 2014-2015 Budget projections, a leading credit rating agency yesterday warned that National Health Insurance (NHI) and low economic growth levels will “complicate the [fiscal] consolidation”.

Moody’s, in what was a mixed assessment of the Christie administration’s Budget communication, agreed that the primary surplus the Government is likely to generate for the 2014-2015 fiscal year will be “a credit positive”.

Yet, while this had “arrested” the national debt’s growth rate, the credit rating agency warned that multiple negative forces were still ranged against the Bahamas as it seeks to put its fiscal affairs in order.

Moody’s warned that the Bahamas’s GDP growth rates would “remain low”, and revealed that it has already slashed 0.3 per cent (equivalent to around $24 million) off this nation’s projected 2015 expansion due to Baha Mar’s delayed opening.

Government revenues are heavily correlated with economic growth rates, and if the latter falls below projections then there is every chance the former’s income will, too.

The Christie administration is banking on a $277 million, or 15.6 per cent, year-over-year increase in revenues in the 2015-2016 fiscal year to both further narrow its deficit and finance a $100 million increase in recurrent spending ($254 million if reallocated capital expenditure is factored in).

Moody’s analysis suggests these forecasts may not be met, and it also expressed fears that the Government’s NHI plans may create “upwards pressures” on recurrent (fixed cost) spending.

The Prime Minister confirmed last week that NHI would not be financed by any new or increased taxes, although it will still be introduced from January 2016.

The Government has allocated an extra $60 million in the 2015-2016 Budget to strengthen the existing public health system in readiness for NHI implementation, which may be the extra spending Moody’s is referring to.

The balance of the $274 million allocated to NHI in the Ministry of Health’s Budget appears to be the monies normally granted to the Public Hospitals Authority (PHA), suggesting the Government is merely reallocating or repurposing existing expenditure.

And, finally, Moody’s is warning that the Government’s timelines and projections for eliminating the GFS fiscal deficit remain too aggressive, itself forecasting deficits that are much higher - in percentage terms - for the 2015-2016 and 2016-2017 fiscal years.

The Wall Street credit rating agency believes the 2014-2015 GFS deficit (which strips out debt principal redemptions) will ultimately come in $40 million higher than the Christie administration’s $196 million forecast.

Still, on the positive side, Moody’s acknowledged that based on the Budget communication, the Government’s 2014-2015 GFS fiscal deficit will be “significantly lower” than it had projected.

The GFS indicator, which measures ‘new’ debt incurred by the Government during a fiscal year, fell from a forecast $286 million or 3.2 per cent of GDP to new estimate of $196 million or 2.3 per cent of GDP.

This was down from the $488 million worth of ‘red ink’ incurred in the 2013-2014 fiscal year, and Moody’s added: “Additionally, the authorities now estimate that once the current fiscal year ends in June there will be a primary surplus that will arrest the upward trend in the government’s debt-to-GDP ratio, a credit positive.

“Although we forecast that fiscal consolidation will be slightly more moderate than the Government’s estimates, the general trend of the fiscal accounts supports our expectation that the deterioration of past years will subside.”

Moody’s attributed the improvement to a combination of increased revenues, largely due to Value-Added Tax’s (VAT) introduction, and “controlled expenditure growth”.

It added that VAT was likely to beat revenue projections for the first six months, based on the $110 million collected during the 2015 fiscal year.

And, while spending was forecast to increase by just 0.7 per cent in the 2015-2016 fiscal year, the Government believes revenues will far outpace this growth rate with a 15.6 per cent expansion due to the first full year of VAT.

“Although we forecast that the deficit will be slightly larger than the Government’s estimate (on a nominal basis, we expect the deficit in fiscal 2014-2015 to be $237 million, or $40 million higher than the official forecast), the fiscal deficit trend supports the government’s medium-term fiscal consolidation goals,” Moody’s added.

The rating agency is expecting the Government to generate a primary surplus for the current and next two Budget years, growing this from 0.6 per cent of GDP in 2014-2015 to 1.5 per cent and 2.1 per cent in 2015-2016 and 2016-2017, respectively.

The primary surplus, which measures the difference between revenues and recurrent (fixed cost) spending, generates a surplus because it strips out the $270 million worth of interest payments the Bahamas is making annually to service its $6.2 billion national debt.

“The large reduction in the fiscal deficit and the potential primary surplus will help to reverse the increase in the government debt-to-GDP ratio of recent years,” Moody’s conceded.

“At 65.8 per cent of GDP in 2014, the Bahamas’ ratio greatly exceeded the 40.2 per cent median for [similarly-rated] sovereigns.

“We expect a gradual decline in this ratio.”

Moody’s assessment will likely be seized upon by the Christie administration as evidence that there is international endorsement of its fiscal consolidation plan.

While the rating agency’s description of the 2014-2015 fiscal “outperformance” certainly suggests that the Government is on the right path, there is no suggestion that Moody’s will upgrade this nation’s sovereign credit rating - something that could lower this nation’s borrowing costs and send a positive message to investors and the international capital markets.

The report implies that this Bahamas is just at the start of a long road, and that the administration cannot afford to rest on its laurels.

For the Moody’s analysis could equally be employed by the political Opposition and other critics to suggest the Government has much more to do.

Especially since the rating agency warned that “relatively subdued economic performance counterbalances the Government’s fiscal consolidation efforts.”

And a close study of its analysis shows Moody’s is projecting a far more gradual decline in the fiscal deficit.

While the Government is projecting GFS deficits equivalent to $141 million or 1.5 per cent of GDP in 2015-2016, and $70 million or 0.7 per cent in 2016-2017, Moody’s is forecasting higher.

It projects that the GFS deficit will be 2.2 per cent of GDP, or $203 million, some $62 million higher, for the upcoming 2015-2016 fiscal year.

And for 2016-2017, the rating agency forecasts that the deficit will be $124.28 million or 1.3 per cent of GDP - some $54 million higher than the Government’s forecast.

This is likely due to Moody’s expectations of lower economic growth rates than the Government is predicting, with the rating agency already cutting its 2015 forecast from 2 per cent to 1.7 per cent.

It warned: “The Bahamas still faces challenges that will complicate the consolidation process over the next few years.

“First, economic growth, which averaged 1.1 per cent over the past five years, will likely remain low. As a consequence of the delay of the opening of the $3.5 billion Baha Mar resort further into 2015, we have lowered our growth estimate for this year to 1.7 per cent from 2 per cent previously.”

Emphasising that Baha Mar would not be the economic growth panacea many have been hoping for, Moody’s added: “Once the resort becomes operational, it will likely boost economic output in 2016 (2.5 per cent forecast), but its influence in the years beyond will decrease, leading to a moderation in growth.

“For this reason, increasing the Bahamas’ competitiveness, particularly on energy generation, will be key to maintaining the economy’s dynamism.”

Moody’s then cautioned the Christie administration over its NHI plans, even though the Government appears to have scaled back its ambitions, realising the economy could not bear such a scheme and the increased taxes required to finance it.

“The second important challenge is the implementation of a National Health Insurance (NHI) programme in 2016,” Moody’s added.

“Authorities have stated that they will not levy new taxes to fund this programme, which will require the reallocation of expenditures to the NHI and could create upward pressure on expenditures.”