The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Moody’s yesterday warned the Government it will likely miss its target of generating a small Budget surplus by 2020-2021, predicting it will still be running a deficit equal to 1 percent of GDP.

The credit rating agency, explaining how its sees The Bahamas’ fiscal and economic prospects to global investors and capital markets, credited the Government for reform measures that had set it on the right path to addressing numerous deficiencies.

However, it suggested that the fiscal consolidation targets were overly-aggressive given The Bahamas’ poor track record of meeting annual Budget projections, and warned it may take one to two years longer than planned to achieve these goals.

“Because the Government has not yet established a track record under its new fiscal rules, our baseline projections are slightly more conservative than the Government’s. We expect a fiscal deficit of 2 percent of GDP in 2018-2019, and deficits slightly wider than the Government’s targets in subsequent years,” Moody’s said in an analysis obtained by Tribune Business.

K P Turnquest, deputy prime minister, in the mid-year Budget statement forecast that 2018-2019’s fiscal deficit will come in $5-$10m below the originally projected $237m. The latter figure is equivalent to 1.8 percent of Bahamian gross domestic product (GDP) or economic output, although a figure around $230m is now forecast.

Moody’s deficit analysis yesterday, while not representing a material deviation from the Government’s forecasts, is nevertheless some 20 basis points higher. This, if it comes true, would add around $26.5m to the “red ink” incurred during the 2018-2019 fiscal year, taking the deficit to around $263.5m.

The credit rating agency said future deficits will also come in higher than those set out in the Minnis administration’s three-year fiscal consolidation plan. While the Government is forecasting a deficit equal to 1 percent of GDP for 2019-2020, keeping it in line with the Fiscal Responsibility Act’s requirements, Moody’s is projecting that it will be around 1.8 percent.

As for the Government’s ambition to run a GFS surplus of $10m in 2020-2021, likely the first time this would happen in modern Bahamian history, Moody’s dashed those hopes by projecting it would still run a deficit close to 1 percent of GDP.

“Nevertheless, even under our more conservative deficit estimates we expect a stabilisation in the Government’s debt burden over the coming years,” it said, confirming that the Minnis administration is on track to achieve its goals - just not as quickly as thought.

Moody’s is forecasting that The Bahamas’ debt-to-GDP ratio will reduce from just over 58 percent presently to 56 percent by the end of the 2020-2021 fiscal year, setting it firmly on a downward trajectory but just not as rapidly as the Government’s 54 percent goal is projecting.

Praising the fiscal consolidation achievements to-date, Moody’s said yesterday: “We expect the fiscal profile to strengthen over time. When the current administration took office in 2017, it vowed to consolidate government finances and has been relatively successful in doing so.

“The fiscal deficit narrowed to 3.3 percent of GDP in 2017-2018 from 5.5 percent in 2016-2017 thanks to a series of revenue-enhancing measures and expenditure controls. The deficit reduction took place even as the Government cleared arrears equivalent to 1.6 percent of GDP (more than $200m)......

“By 2021, the Government also plans to rein in current expenditure growth in line with limits set in the fiscal rules (once the fiscal deficit reaches 0.5 percent of GDP, current expenditure growth will be capped at the rate of nominal GDP growth).”

Turning to the present, Moody’s added: “The Government so far appears to be on track to achieve its targets. In the first six months of 2018-2019, the fiscal deficit narrowed to 1.3 percent of GDP from 2 percent in the same period a year earlier (down 31 percent year-over-year in nominal terms).

“Although there have been delays to implementing higher gaming taxes, revenue increased by 14.7 percent year-over-year, driven primarily by the higher VAT rate. At the same time, expenditures only rose by 4.4 percent, and the increase primarily reflected higher spending on goods and services related to the clearing of arrears, which remains a key priority for the government. Spending on wages and capital expenditures fell in nominal terms.”

Recalling the $760m in unfunded arrears identified by the Government upon taking office, Moody’s reaffirmed that The Bahamas’ fiscal credibility will strengthen in time if it executes - and sticks to - the measures contained in the Fiscal Responsibility Act, pledges to introduce accrual-based accounting in the public sector by 2022, and more frequent fiscal reporting.

“Historically, budgetary outcomes in The Bahamas were revised on an almost yearly basis because of a combination of weak public accounting practices, a lack of transparency and a lack of proper guidelines for fiscal policy outside of the medium-term fiscal consolidation plan, which itself was revised on a yearly basis,” the rating agency added.

“Increased periodicity (releasing quarterly data rather than annual data) and timeliness (releasing the data within four weeks after the end of the referenced quarter) will strengthen transparency and accountability of fiscal policies, and support evidence-based policymaking.

“From a monitoring perspective, it will allow for a better understanding of the effect of in-year fiscal developments that may lead to deviations from the budget. This is particularly relevant for The Bahamas given its exposure to climate-related events, mainly in the form of hurricanes.”

Turning to economic growth, Moody’s said The Bahamas in 2018-2019 had exceeded its long-run average growth potential of 1.5 percent for the first time since 2012 - a gap of six to seven years.

While shaving the International Monetary Fund’s (IMF) growth projections of 2.3 percent for 2018, and 2.1 percent for 2019, Moody’s nevertheless confirmed that the Bahamian economy was set to enjoy its most consistent expansion since the 2008-2009 recession.

“Although we expect economic growth to remain low on a comparative basis, at around 1.8 percent this year and 1.6 percent in 2020 – driven largely by tourism and FDI-related construction projects – it will be higher than potential growth, which we estimate at around 1.5 percent,” the rating agency added.

“Potential growth is constrained by structural factors including high energy costs, low credit growth and a difficult business environment (as evidenced by low rankings in the World Bank’s ease of doing business rankings).

“Although the Government has made some progress in reducing red tape, it has not yet been sufficient to improve the overall business environment. Issues that affect the energy sector will take years to address and to translate into lower energy costs. The Government established a credit bureau this year, which aims to improve credit conditions by providing lenders with enhanced information about borrowers, but we only expect results to materialise in the medium term.”