The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank’s governor yesterday warned there was “no room for complacency”, even though Standard & Poor’s (S&P) gave the Bahamas a much-needed break by maintaining its ‘investment grade’ credit rating.

John Rolle told Tribune Business that even though the Bahamas had, at least temporarily, avoided being downgraded to ‘junk’ status, the S&P reprieve “doesn’t remove any of the economic reform pressures”.

He added that S&P’s continued ‘negative outlook’ on the Bahamas’ was noteworthy, given that it indicated the rating agency’s expectation that the next action it takes is still likely to be a ‘downgrade’.

Mr Rolle said the Bahamas “still has its work cut out” to maintain its existing ‘BBB/A-3’ investment grade rating, particularly when it comes to “firing up” lacklustre GDP/economic growth levels.

S&P’s April 15 analysis indicated that Value-Added Tax’s (VAT) “outperformance”, with almost $536 million in gross revenues collected during the 2015 calendar year, had played a key role in convincing it to hold off on another Bahamas downgrade.

Combined with a fiscal deficit reduction equivalent to almost 1 per cent of gross domestic product (GDP) during the 2015-2016 Budget year’s first seven months, S&P said the Government’s improved financial performance had offset “below par” growth and the ever-increasing $6.7 billion national debt.

On the ‘down side’, S&P is forecasting that the direct government debt-to-GDP ratio will keep rising notwithstanding the Christie administration’s optimism, increasing by a further 2.4 percentage points between now and 2019.

And, when the contingent liabilities (government guaranteed debt) is factored in, the rating agency said the Bahamas’ total debt-to-GDP ratio already exceeds the IMF’s’70 per cent danger threshold’, having hit 73 per cent in last year.

S&P also projected that the Bahamas will be stuck in its “below average economic growth” rut for some time, and forecast a lower GDP expansion for 2016 than the International Monetary Fund (IMF).

It predicted that the Bahamian economy will grow by just 1.2 per cent in 2016, compared to the 1.5 per cent in the IMF’s recent World Economic Outlook. For 2017, S&P is forecasting that growth will improve - barely - to just 1.5 per cent.

And the rating agency maintained its position that “there is a greater than one-in-three chance” that the Bahamas could suffer a downgrade to so-called ‘junk status’ within the next six months to two years, with such a move highly dependent on Baha Mar and the Government’s fiscal performance.

The loss of ‘investment grade’ status would be highly damaging for the Bahamas and its economy, as it signals to the international capital markets that this nation’s creditworthiness is slipping.

As a result, the Government will have to pay more for current and future debt issues, raising its debt servicing (interest) costs, and sucking money away from essential public and security services.

A downgrade to ‘junk’ could also deter investors assessing the Bahamas as a place to invest, as it raises questions about the Government’s economic management.

Mr Rolle, while acknowledging the positives flowing from S&P’s decision to maintain the Bahamas’ existing sovereign rating, said it also highlighted the need to move “aggressively” on fiscal and economic reforms.

He added that S&P’s ‘negative’ outlook merited “quite considerable” attention, since it “underscores” that the rating agency’s next action on the Bahamas is still leaning towards a downgrade.

“It doesn’t remove any of the pressures in terms of the policy reforms, and the need to see the longer term growth prospects fired up,” Mr Rolle told Tribune Business of S&P’s latest action.

“It’s good the rating has not changed, but given the outlook, it underscores the areas where we have to put a lot of energy into ensuring a turnaround.

“I don’t expect you’ll see any complacency around this. We know where the improvements are needed in the economy, and they go beyond how we navigate the present circumstances. The work is still cut out for us.”

Still, S&P’s analysis has moved closer to the Government’s own take on the economy and fiscal situation, the Christie administration having criticised it last year for placing too much emphasis on the $3.5 billion Baha Mar impasse when it downgraded the Bahamas in August 2015.

The rating agency’s April 2016 analysis is something of a ‘mixed bag’, highlighting the good and the bad, but it puts more emphasis on the Government’s relative fiscal consolidation success - just as the Christie administration would wish.

Mr Rolle yesterday said S&P had more evidence upon which to assess the fiscal progress for its latest report, as opposed to last summer, when VAT was just six-seven months old.

“The fiscal track record then was much shorter,” the Central Bank governor said, in reference to the August 2015 downgrade.

“Even though there was that improvement, there’s now been a longer track record under that reform, so that will be why you see more stress on the fiscal at this time.”

However, noting S&P’s growth projections, Mr Rolle said the rating agency was also “stressing” that there needed to be improvements elsewhere besides the Government’s finances, particularly when it came to economic growth.

He added that the Bahamas needed to generate “sustained momentum” in the tourism industry, and improve the returns from major foreign direct investment (FDI) projects, if it was to persuade S&P to improve its outlook to ‘stable’.

“I would expect we’ll want to move, under the ideal circumstances, on an aggressive timeline to see the outlook turn ‘positive’, and be working feverishly on policy and reforms,” Mr Rolle told Tribune Business.

“We just have to hope the optimism we have locally is delivered upon. The rating agencies will be more conservative than the countries themselves. S&P has given us a breathing space, and rest assured they will continue to track what we are doing to see if there is consistency in our actions.”