The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Canadian-owned bank has given the Christie government a major credibility boost by backing its position that the rating agencies are “putting too much emphasis” on Baha Mar when assessing the Bahamas’ creditworthiness.

CIBC, in its Caribbean Market Overview for the 2016 second quarter, acknowledged that this nation remained “haunted” following Baha Mar’s collapse into short-lived Chapter 11 bankruptcy protection just over one year ago.

However, the Canadian-owned bank, which has numerous commercial and offshore banking assets in the Bahamas, suggested that the rating agencies - especially Standard & Poor’s (S&P) - were attaching too much weight to Baha Mar’s failure when assessing this nation’s fiscal position and economic growth prospects.

“The Chapter 11 bankruptcy of the Baha Mar resort project continues to haunt the country. Still, we think that the rating agencies and the market are putting too much emphasis on this project,” CIBC concluded in its analysis of the Bahamas.

Its assessment will give the Christie administration further encouragement that it can stave off a further rating downgrade by S&P, which would slash this country’s creditworthiness to so-called ‘junk’ status and cost it an ‘investment grade’ designation.

Such a development would have potentially serious consequences for the Bahamas’ ability to attract foreign direct investment (FDI), plus its fiscal position and ability to access, and borrow on, the international capital markets.

Still, the Government will now be able to cite CIBC’s analysis as suggesting that S&P is being too negative, and that any further downgrade of the Bahamas is unwarranted. It has long argued that Baha Mar’s impact should be viewed as a bonus to fiscal consolidation efforts, not an essential ingredient.

S&P elected to maintain the ‘status quo’ in its April 2016 assessment of the Bahamas, but many observers will likely argue that its pessimism is correct, given last week’s 2016-2017 Budget announcement.

The Bahamas’ fiscal indicators were all still moving in the wrong direction, albeit more slowly, while the Prime Minister slashed the 2016 GDP growth forecast by a full percentage point to just 0.5 per cent.

CIBC’s assessment was clearly written before Mr Christie unveiled the Budget, although it, too, had picked up signs that the Bahamian economy was slowing following a 2015 in which in actually contracted by 1.7 per cent.

“The Bahamas put in decent growth numbers but show some signs of slowing earlier in 2016,” CIBC said. “Bahamas has underperformed its peers but still did not perform badly.

“Initial data from the Central Bank of the Bahamas suggest that economic activity remained very weak during the 2016 first quarter.

“Preliminary indicators from the Bahamas Hotel and Tourism Association suggest that tourism performance has weakened. Average occupancy and daily room rates declined two percentage points and 3.7 per cent to 73.7 per cent and $275.33, pushing total room revenue down by 5 per cent.”

The main takeaways from CIBC’s Bahamas analysis are that domestic credit growth is being driven entirely by the Government, with private sector borrowing down 0.7 per cent for the 12 months to end-March 2016.

And, while total tax revenues for the eight months to end-February 2016 grew by $210.4 million, this was outpaced by the $219.1 million increase in total current spending.

“While weak economic growth continues to constrain demand for private sector borrowing, strong growth in central government borrowing lifted total domestic credit 1.2 per cent year-over-year over the 12-months ended March 2016, and limited growth in excess liquidity,” CIBC said.

“Despite a 1.1% year-over-year rise in consumer credit, total private sector credit declined 0.7 per cent year-over-year as both mortgage and commercial loan balances declined 0.7 per cent and 4.4 per cent.

“However, a 9 per cent year-over-year rise in net lending to the central government outpaced a 9.8 per cent year-over-year fall in borrowing from the rest of the public sector to lift total government borrowing 6.3 per cent higher.”

CIBC’s analysis also noted that Bahamian commercial bank interest spreads continue to widen, growing by 74 basis points (0.74 percentage points) in the year to end-March 2016.

The average lending rate grew by 40 basis points to 12.1 per cent, while deposit rates dropped a further 34 basis points to 1.34 per cent. The 10.76 percentage point difference will likely provide further ammunition for those arguing that commercial bank lending rates are too high.

On the fiscal front, the Government will likely argue that the CIBC report is academic, given its Budget forecast of a $150 million deficit for the 2015-2016 fiscal year.

With the deficit standing at $243.7 million for the first eight months, this implies that the Government has run a near-$100 million surplus during the last third of the 2015-2016 period, when its Business Licence, commercial vehicle inspection and real property taxes were collected.

Still, the CIBC data suggests that spending was initially growing faster than revenues, while the net VAT impact was just over $290 million.

“Despite an $8.8 million fall in non-tax revenues, total revenues surged $198.7 million to $1.185 billion,” CIBC said of the fiscal performance to end-February.

“Tax revenues rose $210.4 million (24.6 per cent), as VAT receipts of $423.7 million offset declines in taxes on international trade (down $48.1 million), selective taxes on services (down $10.3 million), and other taxes (down $74.4 million) due to tariff reductions associated with the introduction of the VAT. Further, revenues from business and professional fees contracted $35.9 million to $46.7 million.”

On the spending side, CIBC added: “Total current expenditure expanded $219.1 million to $1.305 billion. Spending on interest payments, goods and services, and wages and salaries rose $12.7 million, $34.9 million and $13.9 million, while subsidies and other transfers surged $157.5 million, partially due to reclassification of central government financial support to public corporations from net lending to transfers.”