The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government last night hailed its success in breaking “the perpetual cycle of credit rating downgrades”, despite Standard & Poor’s (S&P) warning its reforms will “take time to pay dividends”.

KP Turnquest, the deputy prime minister, conceded that the Government needs to both “speed up” economic growth and ensure it benefits more Bahamians in a statement that interpreted the credit rating agency’s latest assessment as affirmation of the “tremendous progress” it has made in combating this country’s fiscal woes.

S&P, in its latest assessment of the Bahamian government’s creditworthiness, maintained this nation’s current “BB+/Stable/B” credit rating together with a ‘Stable’ outlook. It suggested it was unlikely to further downgrade The Bahamas over the next two years, although its move yesterday keeps this nation at ‘junk’ status - one notch below ‘investment grade’.

Mr Turnquest, reiterating the message he delivered in the wake of the International Monetary Fund’s (IMF) recent report, said there was no room for complacency despite the “stabilised” economic and fiscal situation.

He urged the country to “stay the course” on austerity measures that have demanded further sacrifices from Bahamians, lowering living standards and disposable incomes, as any “wavering” might “undo the progress” and undermine the country’s medium to long-term economic viability.

While backing Mr Turnquest’s assertion that The Bahamas has “stopped the bleeding temporarily”, private sector representatives last night said it needed “to get some of the ground back” and reclaim the lost ‘investment grade’ status with S&P.

And Robert Myers, the Organisation for Responsible Governance’s (ORG) principal, warned that the Government “cannot have its cake and eat it” in believing it can achieve higher economic growth without tackling the size and cost of the public sector.

He argued that the Government had to “get that monkey off the private sector’s back”, and focus on addressing the cost and ease of doing business as its 2019 priority, while calling on it to explain how it will achieve 5.5 percent gross domestic product (GDP) expansion without “trimming the fat” from the public sector.

Still, Mr Myers praised S&P’s maintaining of The Bahamas’ current rating as “a good accomplishment” for The Government as it further suggested its actions to-date have at least laid a platform to reverse a decade-long economic and fiscal decline.

The global rating agency outlined its expectation that The Bahamas will suffer no further creditworthiness downgrades over the next two years, while praising the Minnis administration for delivering on its promises to introduce Fiscal Responsibility legislation and narrowing the annual deficit.

“The ‘Stable’ outlook reflects S&P’s expectation that robust political institutions will anchor fiscal consolidation and moderate economic growth over the next one to two years,” S&P said yesterday.

“The sovereign credit ratings on The Bahamas reflect the country’s high external liquidity needs and debt levels, which are rising, and a slow-growth economy that has lost competitiveness over the past decade.

“This deterioration has led to weakened public finances and higher debt levels. Nevertheless, the country’s strong institutional foundation continues to provide necessary checks and balances that have prevented further erosion to creditworthiness.”

Outlining the rationale for maintaining, and not upgrading or downgrading The Bahamas this year, S&P added: “We expect the Government to continue to progress toward its fiscal sustainability goals, which should support economic growth.

“Nevertheless, it will take time to reach the Government’s target deficit and debt ratios in our view. We believe that stronger tourism activity [has bolstered] economic growth in 2018, following a return to growth in 2017, supported by the opening of Baha Mar. Longer-term growth prospects will depend on success in attracting new investment.”

S&P’s “glass half full” assessment echoes much of the recent IMF evaluation, finding that while The Bahamas has made progress it still has a long way to go to reverse the past decade’s fiscal and economic instability following the 2008-2009 recession.

And, while the Minnis administration’s reforms to-date may be correct, they will take time to yield the desired results and positive benefits desperately sought by many Bahamians in an economy that continues to suffer with high unemployment and reduced incomes.

“While the Government’s fiscal initiatives should support reduced deficits, we think that it will take time to see the dividends of these reforms translate into sustainable public finances and higher economic growth,” S&P warned yesterday.

It added that the Government “may also consider additional tax reform”, but did not identify these measures, which could be a reference to the ongoing examination of the Business Licence regime.

S&P said “measures taken in the last year should support deficit reduction”, a likely reference to the 2018-2019 Budget’s tax hikes, while it also credited the Government for imposing a 10 percent recurrent spending reduction in the prior fiscal year and requiring state-owned enterprises (SOEs) - which account for 15 percent of expenses - to become self-sufficient.

And the rating agency, while admitting that 2017-2018 revenue targets were missed, and the deficit came in at $415m instead of the projected $320m, said this performance still “represents a significant improvement from the $661m deficit in 2016-2017.”

“In 2018, the Government passed its promised Fiscal Responsibility Act, which includes target deficit, debt and spending limits as well as transparency and reporting requirements,” S&P said. “Although these limits, if met, should arrest the deterioration in the country’s fiscal deficit and debt levels, their implementation targets are 2020-2021 and 2024-2025, respectively.

“In 2018, we expect our measure of net debt to reach 48.9 percent of GDP. Thereafter, we expect more moderate deficits will slow the debt burden increase. Interest expenses should remain slightly below 15 percent of revenue over the next two-to-three years. If the interest burden surpassed 15 percent of revenue, it could put pressure on our assessment of The Bahamas’ debt position.”

S&P also predicted a rise in The Bahamas’ external (foreign currency) borrowings and debt to rise in 2018, hitting a level equivalent to about 65 percent of current account receipts (CARs(./

It applied similar sentiments to The Bahamas’ GDP growth prospects, adding: “The economy’s falling real GDP per capita growth over the past decade reflects structural challenges that will be difficult to overcome in the near term. This growth is lower than that of peers with similar levels of income.

“We expect that GDP per capita will be about $31,470 in 2018, and GDP per capita growth will average 0.21 percent over the next three years. GDP growth in 2017 was muted at 1.4 percent, and partly reflected lower tourism activity in the wake of hurricane-related disruptions... We expect stronger tourism activity to support economic growth in the current year.

“New measures enacted by the Government should eventually lead to better economic growth prospects, although we believe it will take time for these actions to have a measurable impact.”

S&P forecast that The Bahamas will achieve “slightly higher” real GDP growth averaging 1.4 percent over the next three years, due to Baha Mar and the expansion of Nassau/Paradise Island’s hotel room inventory, although this was somewhat offset by the post-Hurricane Matthew loss of rooms on Grand Bahama.

S&P has now kept The Bahamas at ‘junk’ status, and below investment grade level, for two years now. While potentially highly damaging for the Bahamas and its reputation for economic stability, as it signals to the international capital markets that this nation’s creditworthiness (the Government’s ability to pay its debts) has slipped into dangerous territory, the effects will have long since been priced in.

Still, the Government is still likely having to pay more for current and future debt issues, raising its debt servicing (interest) costs, and sucking money away from essential public and security services. The ‘junk’ status may also deter investors assessing the Bahamas as a place to invest, as it raises questions about the Government’s economic management.

The Ministry of Finance, in a statement yesterday, said the S&P report confirmed that the Government had halted the expansion of its annual fiscal deficits and slowed the growth of a near-$8bn national debt.

Mr Turnquest was quoted as saying: “Now that the fiscal and economic situation is stabilised, the task remains to maintain fiscal discipline and speed up the pace of economic growth that must be broad and inclusive.

“The S&P report echoed what we have been saying: We must stay the course, for if we waver now, we could undo the progress and diminish the medium to long-term viability of the country. This administration takes seriously its core responsibility to be fit and accountable stewards of the fiscal affairs and the long-term economic well-being of the nation.”

Mr Myers, while backing Mr Turnquest’s analysis, said The Bahamas now needed to move beyond stabilising its creditworthiness and ensure it returned to ‘investment grade’ status as rapidly as possible.

He added of the latest S&P rating: “We need to see that come back up. We’ve stopped the bleeding temporarily, but now we need to get into recovery mode and get some of the ground back.

“That isn’t going to happen with words alone. It’s going to happen with lowering the cost, and improving the ease, of doing business. People are not going to come here if we are not regionally competitive and it’s a pain in the backside to do business.

“The focus has to be on the cost and ease of doing business, and right-sizing the size of government. That’s how to get the economy moving. There’s no magic here. There’s only so many buttons we can press here, and we’ve pressed the tax and cost button too many times.”

Mr Myers argued that critical to higher GDP growth is the Government’s ability “to trim the weight off the monkey on the private sector’s back” - a reference to a public sector many see as too large and bloated, and an impediment to improving the ease and cost of doing business.

The ORG chief argued that The Bahamas cannot achieve greater economic expansion without tackling the public sector’s size, saying: “You can’t have your cake and eat it: To keep the big fat monkey on the back of the private sector and expect the economy to grow. They’ve got to get real and cut some fat off that monkey.”

Mr Myers also called on the Government to release the report, and recommendations, produced by the ‘Ease of doing Business’ committee chaired by Lynn Holowesko, arguing that both private sector and the public needed to be given an insight into its thinking and plans.

S&P, meanwhile, warned: “We could lower our ratings on The Commonwealth of The Bahamas over this (one to two year) period if public finances do not improve as quickly as expected. This could result from stagnant economic growth, external shocks or weakened political commitment. The lack of confidence that this may generate could push debt costs higher, leading to a downgrade.

“Conversely, we could raise the ratings over the same timeframe if the Government reduces the annual increase in general government debt beyond our expectations. This, combined with significantly higher economic growth forecasts, could lead to an upgrade.