The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government will overshoot its 2014-2015 fiscal deficit projections by more than $100 million, a credit rating agency warned yesterday, due to over-optimistic Value-Added Tax (VAT) revenue forecasts.

Moody’s, in its latest ‘credit opinion’ on the Bahamas, predicted that the full-year fiscal deficit would hit a sum equivalent to 4.4 per cent of gross domestic product (GDP) - more than one percentage point higher than the Christie administration’s own 3.2 per cent forecast.

Based on the Bahamas’ projected $8.932 billion GDP, Moody’s estimate places the likely 2014-2015 fiscal deficit at $393.008 million - some $107 million higher than the Government’s $286 million forecast.

The Wall Street credit rating agency acknowledged that the Government’s half-year fiscal deficit of $273 million, or 3.1 per cent of GDP, was just below the full-year $286 million projection.

Tribune Business pointed out in the immediate aftermath of the mid-year Budget statement that the Government was banking on VAT to run a near-balanced Budget for the six months to end-June, with revenues almost perfectly matching expenditures.

Gowon Bowe, the Bahamas Chamber of Commerce and Employers Confederation’s (BCCEC) chairman, was among those who said this target was unlikely to be achieved - an assessment the world’s leading credit rating agencies also now agree with.

Moody’s yesterday said the Government’s $150 million VAT revenue projections for the six months to end-June 2015 were too optimistic, with earnings from the new tax set to grow at “a more moderate” pace.

“In order to meet its target, the Government expects that over the coming months revenues will outpace expenditures, as the former will be boosted by the introduction of a VAT in January,” Moody’s said of the Christie administration’s 2014-2015 fiscal goals.

“Authorities forecast that VAT revenues in a half-fiscal year should come to about $150 million. Under this scenario, the deficit would amount to $286 million (3.2 per cent of GDP) by June 2015.”

However, it then warned: “Our current baseline foresees a more moderate increment in revenues in the first six months of implementation of the VAT, resulting in a overall fiscal deficit of 4.4 per cent of GDP.”

Moody’s emphasised that the 3.1 per cent of GDP half-year deficit was almost the same as the 3.2 per cent projected for the 2014-2015 full year.

“Over the first half of 2014-2015, current expenditures grew 5.7 per cent while capital expenditures expanded by 27.4 per cent, even though this only represented 13 per cent of total government spending,” Moody’s said.

“Meanwhile, revenues rose by 3 per cent during the same period, leading to a shortfall of $273 million.”

The implications of Moody’s analysis and forecasts are that the Government’s VAT and related revenue goals, and deficit reduction targets, are unrealistic and over-ambitious - at least in the short-term.

Whether this has any ‘material’ implications for the Bahamas’ wider fiscal metrics and national debt remains to be seen, but Moody’s yesterday said government debt as a percentage of GDP hit 64.2 per cent at year-end 2014 and “continued to rise”.

Still, on a more optimistic note, Moody’s added: “Going forward, our baseline sees the debt-to-GDP ratio peaking in 2015 at around 65 per cent and following a downward trend thereafter, supported by lower fiscal deficits and somewhat stronger GDP growth of around 2 per cent.”

The 65 per cent figure is just five percentage points below the 70 per cent ‘danger threshold’ identified by the International Monetary Fund (IMF), above which a country can lose control over its financial affairs.

Apart from improved economic growth expectations, the positives that the Government can take away from the latest Moody’s assessment include no immediate threat of a downgrade to the Bahamas’ sovereign credit rating, which is currently hovering two notches above ‘junk’ status.

Indeed, in what could be interpreted as a mild vote of confidence in the Government, Moody’s maintained its ‘stable’ outlook on the Bahamas’ sovereign rating.

“The stable outlook reflects Moody’s expectation that the medium-term fiscal consolidation plan will contain the Government’s debt burden in fiscal 2015-2016, and afterwards lead to a gradual reduction in the debt-to-GDP ratio,” Moody’s said.

“The rating outlook also envisages that real GDP growth will strengthen somewhat to 2-2.5 per cent in 2015.”

Expressing optimism on the latter score, Moody’s added that the tourism industry “rebounded last year from lacklustre performances” with a 3-3.5 per cent year-over-year increase in the higher-yielding stopover visitors.

It estimated that the Bahamian economy grew by 1.5 per cent in 2014, and based its rationale for increased growth in 2015 on Baha Mar’s opening; a stronger US economy; and the “additional boost” from mobile/cellular liberalisation.

Yet Moody’s was also quick to warn: “While we consider that risks affecting the sovereign’s creditworthiness are currently balanced, downside pressure could emerge should the economy underperform negatively impacting revenues, or if fiscal laxity hindered consolidation efforts, leading to an upward trajectory in the Government debt ratios.”

The rating agency also warned that “government intervention” on behalf of public corporation debts it has guaranteed would slash the Bahamas’ creditworthiness.

And it warned that this nation has a long way to go before its credit rating improves. Moody’s wants the Bahamas’ debt-to-GDP ratio to be restored to that of similarly-rated nations, who average 41 per cent. The Bahamas, of course, is at 64.2 per cent