The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Standard & Poor’s (S&P) wants “more detail” from the Government on how it plans to curb its spending, its lead Bahamas analyst describing 2015 as “a pivotal year” for this nation and its economy.

Julia Smith told Tribune Business that it was still “a mixed picture” for the Bahamian economy and public finances, expressing disappointment that the mid-year Budget did not “elaborate” on how the Christie administration plans to control expenditure.

“There are a few things I noticed,” Ms Smith told Tribune Business. “They reported on the mid-year deficit numbers, and those went up slightly from the same period last year.

“We saw that recurrent expenditure went up by $48 million, and recurrent revenues at end-December were 39 per cent of what the [full-year] Budget forecast. They have a good amount of that to make up for the rest of the fiscal year.”

Ms Smith agreed with the Government that much of the revenue performance was tied to the traditional “seasonality”, as it usually earns the bulk of its income in its fiscal third and fourth quarters - coinciding with the tourism season peak.

And it also expects to get a year-over-year ‘windfall’ from Value-Added Tax (VAT), which half-year estimates project as generating $150-$175 million in extra revenues for the Government.

However, while the Christie administration has - at least for the moment - focused on the revenue side as key to eliminating its fiscal deficits, Ms Smith indicated that it needs to provide specifics on how it will control spending.

“The mid-year Budget didn’t seem to elaborate that much on expenditure control efforts,” she told Tribune Business. “I wanted to see a little more of that; more detail on the expenditure control approach.”

The good news for the Bahamas is that S&P is still not contemplating, for the moment, any negative move on this nation’s ‘investment grade’ sovereign credit rating. That is currently hovering two notches above ‘junk’ status.

Any further cut in the Bahamas’ sovereign credit rating could impede its access to global capital markets, and would likely increase the interest rate compensation investors would demand for the perceived greater risk associated with buying into this nation’s debt issues.

That would further increase this nation’s already high debt servicing costs, sucking away more money from essential public sector services. And a credit rating cut would also send a negative message to the foreign investors that the Bahamian economy is increasingly reliant on.

Ms Smith’s comments are likely to strike a chord with many in the private sector, who as they see it believe the Government needs to fulfil its side of ‘the fiscal bargain’ by cutting expenditure.

Numerous observers believe that government spending, with this year’s full-year recurrent budget at $1.829 billion, is out of control and needs to be reined in, now that the business community has accepted VAT.

The Bahamian subsidiary of the accounting firm, KPMG, also recently suggested that taxpayers were not receiving the services and efficiency that they should in return for a $1.829 billion recurrent (fixed cost) spending Budget.

However, the Christie administration had shown precious few signs of action on this matter, seemingly not even wanting to debate the issue, until the Prime Minister used the mid-year Budget to promise a formal public consultation on whether the Bahamas should adopt Fiscal Responsibility legislation.

To-date, the Government has promised to hold spending increases in line with GDP growth rates. But apart from the Fiscal Responsibility consultation, the only mid-year Budget ‘nods’ on the expenditure side related to better debt management (interest savings) and vague procurement reforms targeted at obtaining ‘value for money’.

“There’s some parts of the mid-year Budget that were short on detail,” Ms Smith reiterated to Tribune Business. “They didn’t go into much detail on where they would be restraining expenditure... I’d have liked to see a bit more detail on that.”

She added that S&P was effectively lukewarm on the idea of introducing Fiscal Responsibility legislation, explaining that while it was a “good idea, there’s always a question of follow through and how much that will be followed”.

While revenues were up $20 million at end-December 2014, the mid-point of the Government’s financial year, recurrent spending was ahead year-over-year by $48 million. This led to a $28 million increase in the recurrent deficit, which stood at $200 million.

The Government’s mid-year GFS deficit stood at a sum equivalent to 3.2 per cent of GDP, higher than the 2.8 per cent ratio achieved at the 2013-2014 fiscal year’s mid-point.

And that GFS deficit (which strips out debt principal repayment) stood at $273 million, a sum equivalent to 95 per cent of the full-year’s $286 million forecast, which means that the Government must run a near-balanced Budget for the six months to end-June to hit its fiscal targets.

“It seems like the revenues are a little behind the expenditure for the first six months,” Ms Smith said. “It’s just a question of seeing if these can catch up in the next six months due to revenue seasonality and VAT implementation.

“It terms of the change from last year, it’s a little bit weaker but we’ll see if, in the second half of the fiscal year, they can catch up.”

Away from the pure fiscal position, Ms Smith said the Bahamas’ overall economic outlook was unclear, with many positives to counter the negatives.

Noting the Government’s optimism and growth forecasts, she told Tribune Business: “It’s still kind of a mixed picture, and we’re waiting to see how things pan out for the rest of this year.

“We’re still waiting for the Baha Mar opening, and another positive is that US growth has been revised up slightly, so we’ll see if that has an effect on tourism in the Bahamas.

“There’s still a lot of contingent issues on the table. We’re going to follow closely the upcoming events, and see what impact they have on the Government’s finances and the economy,” she added.

“We would like to see more of the impact of VAT, what upside the Baha Mar opening has, what tourism does this year, with better growth now from the US and if that picks up tourism.

“We’re going to keep a close eye out this year. A lot of things are happening, so we’ll be watching closely. It is a pivotal year, I think.”