The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Moody's has forecast that the 2017-2018 deficit will overshoot the Government's $323 million target due to the "overhang" from the Christie administration's unpaid bills.

The international credit rating agency, in an update to the global markets following last week's mid-year Budget, said the figures "do not fully reflect" the spending commitments entered into by the former government prior to the May 10 general election.

As a result, Moody's is predicting that the Minnis administration's will exceed last year's $350 million cash-based deficit during its first full year in office, as it continues to pick up the 'blank cheques' inherited from its predecessor.

Referring to the mid-year Budget figures, Moody's February 22 update said: "We consider that this data does not yet fully reflect the outstanding arrears from fiscal year 2016-2017, which would lead the fiscal year 2017-2018 deficit to expand and come to a level higher than that recorded in the last fiscal year (on a cash basis)."

The 'cash basis' rider is important, given that the Government itself last week pegged the 2016-2017 fiscal deficit at $676 million. This, read together with the Moody's report, could be wrongly interpreted as an indication that the 'red ink' for this fiscal year will exceed that latter figure.

The difference between the two - the Government's $676 million figure, and Moody's reference to $350 million - stems from the fact that the two are derived from different accounting methods. The Government's figures were reached using accrual-based accounting, which incorporates spending commitments made but for which funds have yet to be released.

Moody's figures, on the other hand, are derived from the Government's traditional cash-based accounting methods, which placed the 2016-2017 deficit at around $350 million. Last week's assessment from the rating agency suggests that the current year's deficit will exceed that number, and the Government's own $323 million target, using this method.

This situation again highlights the need for clarity and consistency in the Government's accounting, with the Minnis administration having pledged to switch to the accrual-based method - the one seen as providing the most accurate read of its financial position - by 2021-2022 at latest.

In the meantime, it is left exposed to claims from the Opposition that it switched to accrual-based accounting temporarily so it could 'back load' spending commitments into the 2016-2017 deficit, thereby making the Christie administration 'look bad' by deviating from the Government's traditional accounting norms.

K P Turnquest, Deputy Prime Minister and minister of finance, could not be reached for comment by Tribune Business, but in unveiling the mid-year Budget he blamed recently-discovered spending commitments inherited from the Christie administration for the Government's non-debt recurrent spending exceeding that of its predecessor.

Stripping out debt principal repayments, Mr Turnquest said fixed-cost spending for the six months to end-December 2017 was slightly ahead of the prior year's $994 million, coming in at $1.003 billion.

He said: "The outturn this year was negatively impacted by the overhang commitments of the previous administration that have had to be met during the current fiscal year.

"To date, Mr Speaker, we have had to make provisions to settle more than $30 million in verified payment arrears over and above what was known during the Budget exercise last May. There are tens of millions of dollars in remaining commitments from prior years."

Mr Turnquest promised to detail these outstanding obligations once the mid-year Budget debate begins this week, with the half-year deficit of $198 million already equivalent to 61 per cent of the full-year forecast.

Moody's, meanwhile, warned that the recent upward revisions to Bahamian GDP data by the Department of Statistics "flatter" the Government's debt levels and related trends, and "overstate" the strength of its financial position.

"We have set the Bahamas's fiscal strength score at 'Low', which is below the indicative score of 'Low (+)', to reflect the fact that recently-rebased GDP figures flatter both debt levels and the five-year debt trend, overstating the strength of the Government's fiscal position," the rating agency argued.

It added that details of the Christie administration's unpaid bills - together with fiscal consolidation targets for its 2018-2019 Budget - will be key to assessing the Bahamas' progress and whether it has done enough to escape another downgrade to 'junk' status in the short-term.

"We expect to get more information about how the fiscal accounts are evolving with the inclusion of the arrears over the coming months, as well as the measures that the Government plans to implement to continue its medium-term fiscal consolidation plan in the fiscal year 2018-2019 Budget," it added.

Moody's still has the Bahamas 'on probation', warning: "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."

The rating agency said the savings from the Government's public sector downsizings, including the decision not to renew the contracts of many short-term, temporary workers would take time to materialise.

Noting the 6.3 per cent reduction in the public sector workforces size, from 40,990 to 38,435, as captured in November's Labour Force survey, Moody's said: "The decrease in public sector employment is consistent with the Government's pledge to reduce current expenditures - here, by reducing the public sector payroll and, in turn, payroll outlays - in support of fiscal consolidation objectives, although we think that the effects of these measures will become more apparent over time."

This is consistent with the mid-year Budget, which revealed the Government's wage bill - consisting of salaries and benefits - actually increased by $15 million year-over-year to $373 million for the six months to end-December 2017 despite the downsizing.

This was blamed on a combination of an "industrial agreement-related lump sum payment", worth $7.7 million, and $6 million in outstanding overtime payments to police officers. Severance payments to laid-off public sector workers, though, are likely to have been a further contributing factor.

Mid-year Budget data, though, indicates that the Government expects savings from the recent downsizings to come through in the 2017-2018 second half. It is now projecting an $8.282 million reduction in its emoluments (wages and benefits) bill to $733.477 million for the full year, implying that a $23 million-plus savings will be realised in the six months to end-June 2017.

Moody's, though, was more optimistic on the Bahamas' foreign direct investment (FDI) prospects, even though it pushed Baha Mar's completion - and the Rosewood's opening - back to June 1 instead of the repeatedly-touted March/April timeline. The $5.5 billion Oban Energies project also factored into this upbeat assessment.

The rating agency's GDP growth estimates were more subdued than the Government's, as it pegged 2017 GDP expansion at just 0.5 per cent compared to the Deputy Prime Minister's 1.7 per cent forecast from last week. Moody's 2018 estimate is for 2.2 per cent GDP growth, again slightly below the 2.5 per cent forecast by the Government and IMF.

With its 'negative' outlook on the Bahamas influenced by the impact of weaker-than-expected GDP growth and the country's vulnerability to hurricanes, Moody's said this would be upgraded to 'stable' should the Government succeed in slashing the fiscal deficit and reversing the trend of ever-rising national debt - now standing at over $7.5 billion.