The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Reduced spending is “key” if the Government is to hit its 2018-2019 surplus target and succeed in its consolidation efforts, Moody’s has warned, as it expressed concern over the “rising risk” posed by public corporations.

The international credit rating agency, in its full Bahamas country analysis, said the “increased debt burden” of state-owned entities presented a threat to the Government’s fiscal strength.

The analysis, released late last Thursday, added that the Government’s balance sheet would be negatively impacted should debts owed by the likes of BEC and the Water & Sewerage Corporation “materialise”.

“Given our expectations that an economic recovery will be gradual and growth will likely remain around potential (1-1.5 per cent), expenditure restraint will remain key to secure the success of the consolidation plan and to reverse the deterioration of the Government’s balance sheet,” Moody’s said.

“We expect fiscal discipline will play an important role to ensure expenditure reductions in real terms that would support the Government’s goal of a balanced budget by 2018-2019.”

It added: “High spending on social transfers and increased budgetary support to public-sector corporations have increased expenditures. The unemployment rate remains high, making reducing social transfers difficult.

“Additionally, with the increase in the debt burden there has also been a rise in interest payments that consumes a larger part of government revenues.”

Moody’s comments are significant, as they back warnings from both the International Monetary Fund (IMF) and the Bahamian private sector that Value-Added Tax (VAT) and revenue enforcement/administration measures are not a fiscal panacea by themselves.

The credit rating agency’s analysis echoes their argument that a successful fiscal turnaround is heavily reliant on combining revenue measures with spending cuts and restraint, something the Christie administration has yet to consistently demonstrate it can achieve.

Moody’s, though, noted the Government’s plans to start restraining spending after the 2016-2017 fiscal year, a period during which the next general election is likely to be held.

The Christie administration’s own projections, unveiled with the 2016-2017 Budget, show recurrent (fixed cost) spending peaking at $2.321 billion during the current fiscal year.

That represents a 7.7 per cent year-over-year increase, but the Government is forecasting that recurrent spending will start to taper off in 2017-2018, declining by $19 million to $2.301 billion.

A further fall to $2.262 billion is projected the following year, with recurrent spending as a percentage of Bahamian GDP peaking at 25.3 per cent this fiscal year, before dropping to 24.2 per cent and 22.8 per cent in 2017-2018 and 2018-2019, respectively.

However, the fiscal forecasts reveal just how much ‘the size of government’ has increased over the past decade, given that ‘recurrent spending has jumped from $1.642 billion in 2010-2011 to a $2.321 billion peak in 2016-2017 - a rise of $679 million or 41.4 per cent.

Moody’s, meanwhile, warned that debt the Government has guaranteed on behalf of the public corporations and other state-owned agencies represents a potentially major drag on its finances should such liabilities crystallise.

“A potential rising risk to the Government’s fiscal strength is the increase in the debt burden of state-owned enterprises (SOEs), which reached 17.6 per cent of GDP in 2014-2015,” Moody’s warned.

“Although less than half of it is fully guaranteed by the central government, should these contingent liabilities materialise, it would have an important negative effect on the Government’s balance sheet.

“Potential reforms to SOEs would be key to ensure that their finances improve, both to reduce the necessity of sovereign support and to decrease the current transfers the central government makes every year that impact its own fiscal deficit.”

Taxpayer subsidies worth between $50-$60 million per annum are continuing to prop up perennial loss-makers such as Bahamasair, Water & Sewerage Corporation, the Broadcasting Corporation of the Bahamas and Hotel Corporation of the Bahamas.

Apart from the Bahamas Telecommunications Company (BTC) privatisation, the Government’s reform efforts to-date have focused on the energy sector and the contract with PowerSecure International to manage the Bahamas Electricity Corporation (BEC), an initiative that has yet to fully deliver the promised benefits.

One aspect of the BEC reform effort is the refinancing of its legacy debts ‘off balance sheet’ via a Rate Reduction Bond (RRB), an initiative that would remove the liability of a $245 million government guarantee from the national debt.

Tribune Business reported last week how Moody’s had joined the IMF in projecting that the Government will likely overshoot by $100 million its projected 2015-2016 fiscal deficit target of $150 million.

Together with the upward revision of the 2014-2015 fiscal deficit, from 2.3 per cent of GDP to 4.4 per cent, Moody’s said: “These instances show that fiscal consolidation has been more gradual than previously thought, especially as VAT helped increased revenues by almost 3 per cent of GDP in one year, and has pushed our estimate of the peak in debt-to-GDP ratio to the end of 2016/17.

“Given our expectation that fiscal consolidation will proceed, albeit at a slower pace than envisaged by the Government, we forecast that the debt-to-GDP ratio will continue rising through 2016-2017.

“Thereafter, the ratio would begin to gradually decline contingent on further deficit reduction and the materialisation of an economic recovery in 2016-19. Given these debt dynamics, we do not expect the Bahamas’ fiscal strength to materially improve relative to peers over the coming years.”

Moody’s, though, acknowledged that the structure of the Government’s debt, and especially the dates when it had to repay investors their principal (maturities), remained favourable.

This, it added, was further boosted by the fact that just over one-quarter, or 28 per cent, of the Bahamas’ $6.778 billion national debt was held by foreign investors.

“The Bahamas’ maturity profile is favourable, with over 70 per cent of government debt maturing in more than five years, and 46 per cent in more than 10 years,” Moody’s said.

“Given this long maturity profile, amortisations tend to be low. Therefore, while the Bahamas has run large fiscal deficits, its overall financing requirements remain below those of other Baa-rated peers.

“In addition, the Government’s external debt as a share of total government debt is relatively low and compares favourably with that of most rating peers.”

All this, Moody’s added, helped to “mitigate some of the risks” associated with the Bahamas’ sizeable debt burden.

The ‘Bahamian dollar’ investor base, it said, had helped the Government to extend the maturity of most bond issues beyond 10 years.