The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government will take a major step towards convincing Standard & Poor’s (S&P) to maintain the Bahamas’ ‘investment grade’ rating if it can hit primary Budget surplus targets from the 2015-2016 fiscal year onwards.

The rating agency, in its April 15 update on the Bahamas, said that meeting its expectations for improving the Government’s ‘primary’ fiscal balance is a key factor in “stabilising” this nation’s credit rating, which is currently hovering one notch above so-called ‘junk’ status.

Acknowledging that the Christie administration’s success to-date with its fiscal consolidation programme was “counter balancing” below-par economic growth and a rising national debt, S&P indicated it is now looking for the Government to meet 2015-2016 full-year targets.

“We expect that the Government will run a very small primary surplus in the 2015-2016 fiscal year of close to 0.3 per cent of GDP, down from the primary deficit of around 3 per cent in 2012,” said S&P.

“We expect this consolidation to continue, with the primary balance reaching 1.7 per cent of GDP by 2019.”

The ‘primary balance’ measures whether the Government’s total tax revenues exceed, or are less than, its recurrent spending in any given fiscal year.

It shows whether the administration is able to cover its fixed costs, such as civil service salaries, rent and public corporation subsidies, from cash flow (tax revenues).

If costs exceed revenues, the Government will run a ‘primary deficit’. If revenues are greater than costs, it will run a ‘surplus’, with this measurement also stripping out both the Government’s debt servicing (interest) and principal repayment costs.

S&P is projecting that the Government will finally move from persistent primary deficits to a surplus by the time the 2015-2016 fiscal year ends on June 30, citing this as a key factor in how it will assess the Bahamas’ creditworthiness going forward.

“The ratings could stabilise at the current levels if steady, albeit low, growth levels are sustained,” S&P said, “ if the Government continues to improve its primary balance in line with our expectations, eventually leading to a reduced debt burden, and if external liquidity pressures remain manageable such that external debt rollover risks are contained.”

Michael Halkitis, minister of state for finance, did not respond to Tribune Business requests for comment before press time last night, but achieving an ever-improving surplus on the Government’s primary balance would represent a decent achievement given its fiscal history.

S&P, meanwhile, said it was influenced to maintain the Bahamas’ current ‘BBB/A-3’ investment grade rating largely because of Value-Added Tax (VAT) outperforming expectations.

This, in turn, had enabled the Christie administration to slash the fiscal deficit for the first seven months of the 2015-2016 Budget year by a sum equivalent to 1 per cent of GDP - around $80 million.

“The government of the Bahamas’ recent track record of fiscal consolidation, led by the VAT implementation, lends credibility to its proactive policymaking aimed at sustaining public finances, and supports our view of the country’s institutional strength,” S&P said.

“We believe that declining fiscal deficits, accompanied by improved external conditions, balance the risks of below-average growth compared with peers and a still-rising debt burden.”

Focusing on the Government’s reform centrepiece, S&P added: “VAT implementation has significantly exceeded revenue expectations.

“In the first full year after the 7.5 per cent VAT was introduced on January 1, 2015, the Government collected $535.6 million in revenues, or approximately 6 per cent of the country’s GDP.

“The VAT’s efficiency ratio, or the ratio of VAT revenue to GDP, divided by the standard VAT rate, is over 80 per cent, demonstrating the tax’s broad base and collection effectiveness.”

S&P said this had driven the year-over-year deficit reduction equivalent to 1 per cent of GDP, “lending more credibility to fiscal consolidation efforts and making fiscal flexibility and performance a rating strength”.

However, S&P suggested that the Bahamas would not eliminate its overall fiscal deficits as quickly as the Christie administration is forecasting, with the national debt set to continue growing over the next four years - albeit at a much slower pace.

And, once contingent liabilities (government-guaranteed debt) is factored in, the rating agency said the Bahamas was already above the IMF’s ‘70 per cent danger threshold’ with a total debt-to-GDP ratio of 73 per cent.

“We expect that overall deficits, though declining, will continue to raise the Government’s debt burden, with the change in general government debt-to-GDP expected to average 2.4 per cent from 2016-2019, leading to net general government debt of around 57 per cent of GDP by 2019, from 54 per cent in 2015,” S&P said.

“However, once we include the debt of public sector enterprises, this ratio rises to 73 per cent of GDP as of 2015. At the same time, we expect general government interest payments to average 12 per cent of general government revenues during the same period.”

When it came to the Bahamas’ economic growth, S&P said this had been negatively impacted by both the Baha Mar debacle and structural weaknesses that had yet to be tackled.

“The economy’s growth bottlenecks - such as structurally high unemployment (which reached 14.8 per cent as of November 2015), high household debt, and persistently high loan arrears in the banking system (which reached 20 per cent as of February 2016) - and risks to the competitiveness of the country’s tourism industry, lead us to believe that growth will remain sluggish in the forecast horizon,” S&P said.

“We forecast real GDP will grow by 1.2 per cent in 2016 and 1.5 per cent in 2017. Our expectation for below-average growth over the next several years follows over a decade of negative real per capita GDP growth on average, which is lower than the Bahamas’ peers that have a similar level of GDP per capita.”

S&P’s 2016 growth forecast for the Bahamas is less than the International Monetary Fund’s (IMF), which last week reaffirmed its expectations for a 1.5 per cent economic expansion this year.

The rating agency concluded by warning that there was still “greater than a one-in-three chance” that the Bahamas could be downgraded to ‘junk’ status within the next six to 24 months.

“We could lower our ratings if uncertainty surrounding the delayed Baha Mar opening depresses growth beyond our current expectations, if our fiscal projections for the government’s primary balance are not met, or if the country’s external liquidity deteriorates,” S&P added.