The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas has 12-18 months to achieve the Government’s targeted $100 million austerity savings and other goals key to “turning around” Moody’s negative outlook on this nation.

K P Turnquest, the deputy prime minister, told Tribune Business that the Government, private sector and residents faced “hard work” and “sacrifice” in executing on the plans that persuaded the credit rating agency not to downgrade the Bahamas to ‘junk’ status.

Emphasising that the Minnis administration was not yet celebrating, or resting on its laurels, after avoiding the loss of ‘investment grade’ status, Mr Turnquest said it was “unfortunate” that Moody’s had cut its outlook on this nation from ‘stable’ to ‘negative’.

Still, the rating agency’s actions on Friday have effectively given the Government ‘breathing space’ to execute on its fiscal consolidation plans, and show it is serious and can deliver on promises to turn around $300 million-plus annual deficits and a national debt that now exceeds $7 billion.

“That’s exactly how I read it, which is fair,” Mr Turnquest, who is also the minister of finance, confirmed to Tribune Business. “We will have to work hard to turn around the outlook. 

“We have come through a very challenging period, and there are still some headwinds that we face. We have outlined plans to address it, and we now have to do what we say we’re going to do and make it happen.”

He added that the Government viewed Moody’s decision to maintain the Bahamas’ current ‘Baa3’ bond and issuer rating “as an endorsement of the approach we are taking to this situation”, with austerity measures that include a public sector hiring freeze and a 10 per cent cut to the budgeted $2.67 billion recurrent expenditure.

Acknowledging that these measures would reduce the Government’s role in the economy, Mr Turnquest said: “We recognise that as a result of the fiscal constraints we had to put in place there will be some effects of that, in terms of spending and activity from the Government side, but if we are to get this situation under control there will be negative consequences.

“If we get it right, take our medicine today, we will be on a more positive path next year and the year after. They’ve [Moody’s] given us the breathing space we need to demonstrate we’re serious about our plan and to get it done.”

Moody’s, in the ‘credit opinion’ that accompanied Friday’s rating action, said the Government was seeking $100 million worth of cost savings on its budgeted spending for the 2017-2018 fiscal year.

“Over the past two months, the Bahamian authorities announced a series of measures to reduce the deficit,” it said. “On the expenditure side, the Government is targeting $100 million (1.1 per cent of GDP) in savings during fiscal year 2017-2018, in part to be achieved by a 10 per cent cut in ministries’ spending and a hiring freeze.”

The $100 million target is some way short of the $267 million that represents 10 per cent of the $2.67 billion recurrent budget, but Mr Turnquest expressed confidence the Government will hit its fiscal goals.

The Minnis administration’s austerity measures were announced in the same week as Moody’s visited the Bahamas, but the Deputy Prime Minister denied that these were promised to induce the rating agency not to follow through with the threatened downgrade.

“You would have taken from our Budget communication that we intended to engage in a serious review of all expenditure, and that we would do our best to rein in expenditure, never mind the Budget levels, to try and bring in a fiscal deficit much lower than projected,” Mr Turnquest told Tribune Business.

He added that the 2017-2018 Budget was largely inherited from the Christie administration, and added: “It created some things we could not change, but also some areas where we believed we could make some improvements.

“The 10 per cent across-the-board is a recognition that we believe there is some fat in the expenditure we can take advantage of. We want to be very aggressive on that. I believe we’ve identified some significant savings, and it’s a matter of execution.

“Everyone recognises they have to tighten their belts a bit more and better times are ahead of us, but to get there we all have to recognise we have to make sacrifices. We do expect to achieve that 10 per cent, and are being very aggressive about our expenditure.”

Mr Turnquest told Tribune Business that the Government expected to produce “robust” Fiscal Responsibility legislation, which would target that attaining of an annual GFS balanced budget deficit to stabilise the Bahamas’ debt ratios, by year-end.

He added that it was working with the International Monetary Fund (IMF) to develop the legislation, but the process had not yet reached the stage where drafts could be issued for consultation locally.

“We are well on our way in respect of that,” the Deputy Prime Minister said of Fiscal Responsibility legislation, “and we expect to have a robust piece of legislation before the end of the year.”

A GFS balanced budget would strip out debt principal repayments, but ensure the Government is not adding any new money to the $7 billion-plus national debt.

The Government’s 2017-2018 Budget targets a $323 million GFS deficit, equivalent to 3.5 per cent of GDP, but Moody’s believes the Minnis administration can slash this to 2.8 per cent.

“Despite the significant deterioration in the Government’s fiscal strength stemming from the large size of the 2016-17 deficit, it is important to note that the widening of the deficit was mainly caused by one-offs (impact of hurricane and election spending),” Moody’s said.

“Consequently, while the drop from a deficit of 7 per cent of GDP in fiscal year 2016-2017 to 2.3 per cent in FY2017-2018 (as expected by the Government) may appear steep, the actual adjustment on the expenditure side will be done from a ‘lower’ starting point.

“We estimate the fiscal deficit will therefore narrow this year to a more conservative 2.8 per cent of GDP. We further forecast that the primary balance will return to surplus some time in 2018-2019.” The latter measure is calculated by measuring the Government’s revenues against recurrent spending, minus interest payments on its debt.

Mr Turnquest said Moody’s ‘negative’ outlook on the Bahamas recognised “the short-term risks” created by the Bahamas’ austerity measure and cut backs, but he argued that this nation’s fiscal woes would only mount if it continues to ‘kick the can down the road’.

“By the same token, they recognise that being disciplined and staying the course is essential to recognise the results we expect and really need to get the country back on track,” Mr Turnquest told Tribune Business.

“No matter what breathing room we have, if we don’t fix the structural problems we have, they will only grow worse. We don’t live in a bubble, and to get our situation fixed we will all have to take a sacrifice.”

Mr Turnquest, though, expressed hope that Moody’s decision to maintain the Bahamas’ investment grade rating would boost investor, private sector and consumer confidence, thereby spurring economic growth.

“It’s critical for us to maintain the rating; everything hinges on that in terms of ability to borrow at reasonable rates and access to capital,” he said. “It affects a number of non-government ratings and credit issues.

“This will also only give that much more confidence for investors, local and international, that this is a place to do business, and that the Commonwealth of the Bahamas has a good plan to stabilise and grow the economy.”

Moody’s made clear on Friday that it had, for the moment, decided to hold off on following Standard & Poor’s (S&P) in downgrading the Bahamas to ‘junk’ status based on a combination of factors.

These included the Government’s fiscal consolidation plan; prospects for higher economic growth via Baha Mar; upward revisions to the Bahamas’ GDP numbers; and a favourable debt profile, with much of the Government’s bonds held by Bahamian investors and institutions. The debt’s profile is also favourably spread out.

However, in a warning of what will happen if the Bahamas fails to execute, Moody’s said: “Moody’s would downgrade the rating if over the next 12-18 months we observe that fiscal consolidation efforts are unlikely to reduce deficits to levels that would reverse the trend of rising debt ratios and lead to a stabilisation of government debt metrics.

“Downward ratings pressure would also emerge if economic growth were to underperform relative to government expectations, negatively impacting revenues and overall fiscal metrics.

“We would also consider a downgrade if contingent liabilities stemming from Bank of the Bahamas – or other state-owned enterprises – materialise on to the sovereign’s balance sheet, leading to a material worsening of government debt metrics.”