The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) has warned the Government that its fiscal consolidation projections are “too optimistic”, and that the deficit for the just-closed 2015-2016 year will be around $100 million higher than forecast.

The Fund, in its full Article IV report on the Bahamas that was released this week, warned that “weaker than expected” economic growth meant the Christie administration was likely to achieve its fiscal objectives at “a more gradual pace” than it is forecasting.

In particular, it suggested that the GFS fiscal deficit for 2015-2016 will be some 1.3 percentage points of GDP higher than Prime Minister Perry Christie forecast in his recent Budget address.

Mr Christie expressed confidence that the deficit for the fiscal year that ended on June 30, 2016, would come in at $150 million or 1.7 per cent of GDP, slightly higher than the original $141 million projection.

However, given that 1 per cent of Bahamian GDP is roughly equivalent to $80 million, the IMF’s 3 per cent deficit forecast suggests the 2015-2016 GFS deficit will come in around $240-$250 million.

“Authorities expect that strong VAT collection, together with reforms to enhance revenue administration raising additional revenue of up to 2.5 per cent of GDP, will contribute to significant consolidation in the near-term,” the IMF’s Article IV report said.

“However, with weaker than expected growth weighing on revenue collection, the authorities’ plan that seeks to reduce the 2015-2016 fiscal deficit to 1.5 per cent of GDP, and to achieve a near balanced budget by 2017-2018, appears too optimistic.

“Staff projections suggest a still significant, but more realistic and growth-friendly pace of consolidation, with the fiscal deficit projected to narrow to 3 per cent in 2015-2016,” the Fund continued.

“The fiscal deficit is expected to decline further in 2016-2017, albeit at a slower pace, with debt stabilising at around the same time.

“Credible reforms to ensure fiscal responsibility, including decisive steps towards a medium-term Budget framework, would allow fiscal policy to better balance the need for continued consolidation and support for the recovery in the near-term.”

The Christie administration will be able to draw some encouragement from the IMF’s confirmation that it is ‘on the right path’ towards fiscal consolidation and achieving its deficit elimination goals, albeit at a much slower pace than envisaged.

However, the timing of the Article IV report’s publication, and affirmation that the fiscal projections are over-optimistic, will be viewed as less helpful by the Government in the context of the threatened downgrade to ‘junk’ status by Moody’s.

For the IMF is touching on several of the criteria that the New York-based rating agency will assess during its two-month review of, and visit to, the Bahamas, the latter of which is set to take place in the next few weeks.

And the Article IV report, in common with Moody’s, also disagrees with the Christie administration’s projection that the Government’s direct debt-to-GDP ratio peaked during the last fiscal year.

The IMF is forecasting that the direct debt-to-GDP ratio will increase from 65.9 per cent of GDP in 2016 to 67 per cent next year, before stabilising at 66.8 per cent in 2018 - achieving “a higher level than previously expected”.

This contrasts sharply with the Prime Minister’s Budget statement, in which he said: “The ongoing rise of the Government debt burden will be arrested and the ratio of debt to GDP will decline to 64.1 per cent in 2016-2017, down from the peak of 64.6 per cent in 2015/16. It will fall steadily, thereafter, to stand in the area of 59 per cent in 2018-2019.”

The Article IV report thus reiterated: “The pace of fiscal consolidation has been more gradual than previously envisaged owing to both weaker than expected growth and recent revisions in the fiscal accounts.”

Then, in tones that will encourage the Government, it added: “Looking forward, and despite the more gradual pace of consolidation, the primary fiscal balance is expected to return to a surplus over the next two years.

“As a result, the central government debt-to-GDP ratio is expected to stabilize at 67 per cent of GDP by 2016-2017 and begin to decline gradually thereafter.” It is projected to drop to 64.4 per cent in the medium term.

However, the IMF then repeated its annual call for the Government to extend public sector reforms to the likes of Bahamasair and the Water& Sewerage Corporation, given the annual $50 million drain they represent on the Bahamian taxpayer and Public Treasury.

“Fiscal vulnerabilities extend beyond the central government,” the Article IV report added. “State-owned entities (SOEs) debt amounted to an additional 17.4 percent of GDP in December 2015. Staff urged the authorities to advance state-owned enterprise reforms to reduce their drain on the Budget.”

Of that latter sum, the IMF said the Government has guaranteed an amount equivalent to 8.2 per cent of GDP, taking the total national debt to around 74.1 per cent of GDP - a figure above the 70 per cent threshold where countries are in danger of falling into a ‘debt spiral’ and losing control of their financial affairs.

Despite its woes, the IMF said the Bahamas is aided in its fiscal battle by the high level of debt held by local investors, which “eases” the rollover of bond issues.

“Ample liquidity in the domestic banking system and a captive investor base will continue to ease rollover concerns,” the Article IV report said.

“Despite continued increases in debt, its composition remains favourable. A large proportion, 72 per cent of total debt, is held in local currency. Short-term debt is only 12.7 per cent of total debt and is denominated in local currency. The weighted average time to maturity for the government’s domestic and external bonds are 9.6 and 16 years, respectively.

“Overall, the heat map continues to point to low to moderate risks to debt sustainability. Nevertheless, largely reflecting the still sizable current account deficit, the external financing requirement, which surpasses the benchmark for emerging market comparators, remains a significant risk to the debt profile.”

The IMF added that the Bahamas’ external debt, meaning obligations owed to foreign investors, was “relatively low” at 24.2 per cent of the total, and forecast to stabilise at 22.3 per cent by 2021.