The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Moody’s has raised “a red flag” over the need to contain government spending and spur faster economic growth, the Opposition’s finance spokesman is arguing.

K P Turnquest told Tribune Business that the rating agency’s report highlighted concerns his party has been voicing for some time, particularly the fact that the $6.5 billion national debt is expanding more rapidly than the economy.

He again queried how the Christie administration was employing its new Value-Added Tax (VAT) revenues, given that it had promised that the ‘windfall’ would pay down debt and halt the debt-to-GDP ratio’s increase.

“It’s a red flag that something drastic needs to be done to contain and reduce [government] expenditure, while raising revenue and not over-burdening the business community and taxpayer in the process,” Mr Turnquest told Tribune Business of the Moody’s report.

“This has been a concern all along. In the build-up to VAT, the Government made a promise to the Bahamian people that they were going to utilise these revenues to pay down the debt, and they’ve been going on and on about how they will reduce this borrowing.

“The evidence has proven clearly that the debt is still growing at an alarming rate - $1.5 billion over the last three years, with no apparent end in sight,” the east Grand Bahama MP added.

“The question has to be asked: What has happened to these additional revenues? The net effect is still negative.”

The Government, though, has frequently pointed out that the depth of the Bahamas’s ‘fiscal hole’ means that the country will not be able to climb out overnight.

Michael Halkitis, minister of state for finance, could not be contacted for comment, but he has in the past frequently stated it will take several years to eliminate the persistent GFS deficit.

To its credit, the Government has managed to narrow the fiscal deficits - as acknowledged by Moody’s. And Mr Halkitis has confirmed that VAT revenues are being paid into the Consolidated Fund, where they are being used to cover all the Government’s expenses, nit just debt.

However, the Government has yet to undertake any significant moves to rein in, and become more transparent, on its spending. It has also yet to launch the promised policy paper on introducing a Fiscal Responsibility Act, or so-called ‘fiscal rules’, in the Bahamas.

As a result, many observers are concerned that the new VAT monies will be used to finance extra social programmes, such as the proposed National Health Insurance (NHI) scheme.

Moody’s half-yearly assessment is timely, since it sets the stage for the Christie administration’s mid-year Budget communication, which is supposed to be made in the House of Assembly today.

The Government is also scheduled to meet with Moody’s more hawkish counterpart, Standard & Poor’s (S&P), in the wake of today’s communication in a bid to persuade it to hold-off on a further downgrade - one that could push the Bahamas into ‘junk’ status.

The Moody’s report also coincides with the arrival of an International Monetary Fund (IMF) team in the Bahamas on March 10. The Fund’s representatives will be here until March 23 to conduct their annual Article IV economic assessment.

Tribune Business sources said that apart from the standard meetings with the Government, Ministry of Finance, Central Bank, political opposition and the Bahamas Chamber of Commerce and Employers Confederation (BCCEC), the IMF will also meet with specific industry groups.

The topics for discussion include VAT’s impact, the ‘ease of doing business’, and prospects for economic growth and job creation.

Moody’s, in its half-yearly assessment of the Bahamas, suggested that the Government needed to rein in its spending during the remaining months of the 2015-2016 fiscal year.

It also expressed concern about the Bahamas’ “persistent rapid debt accumulation”, and said: “While lower deficits should contribute to the stabilisation of the upward debt trend seen in the Bahamas, we note that rapid debt accumulation persisted last year.

“According to Central Bank of the Bahamas data, the central government’s debt stock rose 5.8 per cent year-over-year to $5.9 billion by December 2015. Although this is below the 12.8 per cent average growth in the debt stock in 2013-2014, it continues to exceed nominal GDP growth (estimated at 2.8 per cent in 2015).

“For this reason, we estimate that the Government’s debt-to-GDP ratio reached 67.8 per cent in 2015, far above the ‘Baa’ median of 42 per cent.”

The ‘Baa’ notation is a reference to other countries that enjoy a similar rating to the Bahamas, and Moody’s said this nation enjoys “the lowest fiscal strength score” among such nations.

“It is what we’ve been saying all along,” Mr Turnquest told Tribune Business. “The level of growth in the debt versus the level of growth of the economy has been inverse, and the more the debt-to-GDP grows, the more difficult it becomes to get it under control, as you’re spending so much on interest that you don’t have a cushion to pay it down.”

Speaking ahead of today’s mid-year Budget communication, the FNM’s deputy leader expressed concern that the Government would be tempted to loosen spending controls in the upcoming 2016-2017 Budget, given that it was an election year.

He added that the Opposition also planned to use the mid-year Budget debate to address the fact that the deficit for the first five months of the 2015-2016 fiscal year was almost exactly the same as what the Government had projected for the full 12 months.

“The fiscal deficit in 2015-2016 so far has been halved relative to the same period a year ago, but it is in line with the full-year Budget,” Moody’s said in its report.

“Therefore, in order to maintain the deficit on target with the Budget, expenditure restraint may be required.”

Tribune Business revealed earlier this year how the deficit for the five months to end-November, based on Central Bank of the Bahamas figures, stood at $134.1 million, a sum equivalent to 95.1 per cent of the projected $141 million GFS deficit for the 2015-2016 full year.

Moody’s last week projected the Government’s 2015-2016 full year deficit will total 2 per cent of GDP, or around $184 million.

That is slightly higher than the Christie administration’s own projections of a 1.5 per cent, or $141 million, deficit when the Budget was presented last May.

“We did take note that they’ve pretty much eaten up the deficit for the full Budget year,” Mr Turnquest said.

Given that the Government will find it difficult to increase revenues or reduce its fixed-cost (recurrent) spending, he warned that the only savings available were on capital spending.

Warning that key infrastructure assets and government services might thus be starved of essential investment, Mr Turnquest criticised continued spending on events such as Bahamas Junkanoo Carnival.

He argued that such spending was being undertaken without any analysis of the potential returns, impact on the $6.5 billion national debt, and “whether it makes sense”.

“It’s a very critical time for the fiscal outlook that the Government projects to the international community, and investor community, on the sustainability of our economy,” Mr Turnquest told Tribune Business.

“I think the mid-year Budget, and upcoming [full] Budget, are going to be very interesting as they will give an indication of where we are, and where they intend to take us for the next few months.”

While Moody’s attached little weight to the continued Baha Mar standstill in its analysis of the Bahamas’ creditworthiness, Mr Turnquest said much of the economy’s growth prospects remained tied to the $3.5 billion project.

The rating agency’s report said the Bahamas had achieved average economic growth of just 1 per cent over the past four years, and added: “The Bahamas’ growth performance since our last rating action in September 2014 has been weaker than our baseline at the time.

“This has not yet had a strong negative effect on the Government’s fiscal consolidation efforts because revenues have been boosted by the new VAT.

“Nevertheless, weak growth has pushed the peak in the debt-to-GDP ratio back by a year to 2015, and to a higher level than the one we had initially envisaged. In our view, this higher debt burden will begin to weigh on the sovereign’s creditworthiness as long as growth underperforms.”

Moody’s also called on the Bahamas to tackle “several structural rigidities” in its economy, particularly the “the bureaucratic burden” that inhibits the so-called ‘ease of doing business’.

“Our ‘ease of doing business’ ranking has fallen significantly in the last few years, which is not a good sign,” Mr Turnquest conceded. “These are all tied to our performance and growth prospects.

“Anybody who has been in business for the last few years will tell you it’s getting more and more onerous, and more and more difficult, to do business in the country.

“I would agree with them [Moody’s] that something needs to be done in the way business is conducted here, and that we need to free up and streamline the bureaucracy to make the conduct of business easier.”