The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The deputy prime minister yesterday disagreed that The Bahamas faces a "grim" economic and fiscal outlook even though government debt is forecast to increase by $1.3bn over the next five years.

K Peter Turnquest told Tribune Business that "strong" tourism arrivals, coupled with a foreign direct investment (FDI) pace that remains "on track", will enable the country to shrug off Hurricane Dorian's devastating impact by generating a 2.1 percent expansion in economic output for 2021.

His optimism came despite revealing earlier to the House of Assembly that the Category Five storm has blown the Government off its key deficit and debt ratio reduction targets by between five to 10 years depending on the indicator.

Its 2019 Fiscal Strategy Report, tabled in Parliament yesterday, now forecasts that nine-figure deficits will persist for the next five years post-Dorian and only come back into line with the Fiscal Responsibility Act's 0.5 percent of GDP target by 2024-2025.

The report also shows that the sustained "red ink", caused by the Government having to borrow to cover the gap created by its spending exceeding income, is projected to drive its direct debt from $8.205bn this fiscal year to almost $9.5bn over the same period.

This represents a $1.3bn debt surge that will keep the Government far away from achieving the Fiscal Responsibility Act target of a 50 percent debt-to-GDP (gross domestic product) ratio. That is projected to still be at 62.9 percent in 2024-2025, and Mr Turnquest yesterday admitted that this ratio will only "resume its downward trajectory" towards 50 percent come 2028-2029.

His acknowledgement that the Government will only start "returning to compliance" with the Act's debt and deficit reduction goals by 2024-20205 - some two years after the next general election has to be called - exposes the severity of the blow dealt by Hurricane Dorian to the public finances.

Mr Turnquest said the current fiscal year's deficit is now forecast to increase by a further $104m from the immediate post-Dorian estimate of $573.4m, hitting $677.5m. That sum, equivalent to 5.3 percent of Bahamian GDP, will require the Government to seek Parliament's approval to borrow $507.9m to cover the difference between the original Budget estimate of a $137m deficit.

With Dorian restoration continuing to serve as the chief drain on the Public Treasury, the Fiscal Strategy Report outlines a painfully slow reduction in the fiscal deficit to $498.9m in 2020-2021 and $301.2m the following year. Deficits of $238.6m and $122.6m are forecast for 2022-2023 and 2023-2024, respectively, with the 0.5 percent of GDP goal finally reached the following year at $82m.

The deputy prime minister yesterday reaffirmed the Government's projection that it will lose some $236m in projected revenues for the 2019-2020 fiscal year as a result of Abaco's and Grand Bahama's economies being taken-off line, while also incurring some $182.7m in unplanned spending.

"Given the disruption in business activities in both Abaco and Grand Bahama, revenue loss is estimated at a combined $565.8m or an average 1 percent of GDP over the four affected years," the Fiscal Strategy Report said.

The Government is forecasting that it will lose $100m and $132.5m in income from Abaco and Grand Bahama, respectively, this fiscal year, with the combined loss - Abaco, $87.9m, and Grand Bahama, $81.9m - falling to $169.8m in 2020-2021.

The revenue loss is then forecast to decline to $133.3m in 2021-2022, split into $65.4m from Abaco and $67.9m from Grand Bahama, before a final drop to a combined $30m in 2022-2023.

On the spending front, Hurricane Dorian is forecast to produce $107.4m in unplanned recurrent costs over the next two fiscal years that are mainly associated with landfill operations ($46.2m), some $11.4m in unemployment benefit payouts, and a range of social services that will come under pressure from storm victims.

Total Dorian-related capital expenditures have been pegged at $214.2m over the next three fiscal years through 2021-2022, with the bulk of the outlay - some $100m - incurred during this budgetary period. A further $85m is due to be paid out in 2020-2021, with electricity restoration accounting for almost $80m over that three-year period.

Some $17m is being earmarked for Freeport's Rand Memorial Hospital, with $38.3m allocated to temporary housing.

Besides the "huge fiscal costs" imposed by Dorian, Mr Turnquest said the 2019-2020 deficit had also been inflated by "several spending imperatives, aggregating nearly $120m for fiscal year 2019-2020,which represent urgent priorities and are critical to stable governance of the public sector and the provision of much-needed infrastructure improvements".

Based on the Fiscal Strategy Report, this figure appears to include $30m out of a total $130m that is due to be spent over the next four years on improving the skills and expertise of the Bahamian civil service.

"Given the pressing need to make various human resources reforms and increase technical capacity across the public sector to enable the Government to deal more effectively with its administrative and policy agenda, the Government has provisioned an aggregate of $130m to be spent - with $30m for fiscal year 2019-2020, and the balance spread almost equally over the ensuing three fiscal years," the report said.

Yet despite the Fiscal Strategy Report's almost-relentless pessimism, Mr Turnquest told Tribune Business via messaged replies to its questions that there was sufficient cause for optimism over the medium-term economic outlook.

"I don't agree with you that the outlook is grim," Mr Turnquest replied. "Foreign direct investment (FDI) continues on track, and the commitment to rebuild remains solid. Micro, small and medium-sized enterprise (MSME) participation and creation continues to improve. Tourism arrival numbers remain strong."

The Fiscal Strategy Report detailed multiple FDI-related projects that are in the pipeline, albeit all are already known. Besides Baha Mar's $300m water park expansion, the other investments detailed were Carnival's $100m cruise port; the proposed $275m redevelopment of the Grand Lucayan and Freeport harbour by Royal Caribbean/ITM Group that it said should be sealed by year-end; and Disney's cruise port at Lighthouse Point, south Eleuthera.

Asked by this newspaper whether the Government was concerned that the increased Dorian-related borrowing, and associated deficits, could push The Bahamas towards the 'debt spiral' it has been so keen to avoid, Mr Turnquest said: "The Fiscal Strategy Report contemplates the increased borrowing cost."

Bahamian taxpayers will be paying almost $400m annually to cover the Government's debt servicing costs (interest payments) by 2022-2023, with this sum breaching that mark the following year.

"Interest costs associated with increased borrowings requirements is assumed to add an additional $263.6m (9.7 percent) to the forecast spend across the budget and medium-term horizon," the Fiscal Strategy Report reveals, exposing the scale of the increased debt servicing burden that will be placed on Bahamian households and businesses by Dorian-related borrowing.

Mr Turnquest yesterday conceded that all the emergency financing mechanisms and contingencies put in place by the Government were little match for storms as powerful as Dorian, when he was asked by Tribune Business whether a lot would have to go right - meaning so similar storms or global recessions - if is to meet its projections and get fiscal consolidation back on course.

"The Dorian experience proves that even with contingencies the worst can happen," the deputy prime minister said. "The Financial Stability Report gives us certain parameters to work within. We intend to maintain that commitment and the principles that got us here using the best planning tools available to us.

Mr Turnquest added that the affordability of insurance coverage for Bahamian homeowners and businesses was "a great concern and a reality that all in the region will have to face" in the aftermath of Dorian and 2017's major hurricanes. With premium rises of between 15 percent to 30 percent forecast, hurricane protection is being placed further out of reach for many, leaving the state with exposure to an ever-increasing recovery burden.

"We can help ourselves, however, by resilient building and adherence to building codes," Mr Turnquest added. "We are studying the issue and concepts that may incentivise greater insurance participation."

The Fiscal Strategy Report predicts that Bahamian economic growth will rebound to 2.1 percent in 2021, driven by foreign direct investment and post-Dorian reconstruction, following a 0.6 percent contraction in 2020 and the halving of this year's projected output expansion to 0.9 percent.

"These activities, alongside the Government’s tax relief in the hurricane-ravaged islands to support and incentivise small business recovery, could result in near to full employment in the construction sector, restore previously lost jobs and increment direct and indirect final employment opportunities," the Fiscal Strategy Report said.

"At the outer margins of the medium-term horizon, the IMF expects real GDP growth to ease to 1.7 percent in 2022, before gradually reverting to its long-term potential growth rate projected at an average annual 1.6 per cent.

"The Government’s ongoing commitment to growing the real sector, through the removal of structural impediments, and targeted initiatives to support both domestic and foreign direct investment, could improve this outlook."

The Fiscal Strategy Report said registered businesses in Abaco and Grand Bahama numbered 1,752 and 1,812, respectively, pre-Dorian. It added: "Employment conditions in The Bahamas are also expected to worsen due to the disruption to business activity and productive capacity in both Abaco and Grand Bahama, which account for 2.6 percent and 13.8 percent of the labour force, respectively."