The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The deputy prime minister yesterday accused the opposition’s leader of “working his hardest” to attract the credit rating agencies’ attention, as he asserted there was “no sign” of a Bahamas downgrade.

K P Turnquest, rejecting Philip “Brave” Davis’ fears that the country is “falling off a cliff” post-Hurricane Dorian and facing a “financial crisis”, argued that this was the position when the Minnis administration took office in May 2017 but it had since “made significant progress” towards returning to fiscal health prior to the category five storm’s arrival.

He also hit back at Mr Davis’ concerns that the government is failing to pay legitimate value-added tax (VAT) refunds to Bahamian businesses, adding that slight delays were “nothing unusual” and that the administration had “worked very hard” over the past two years to narrow the processing timeline.

Mr Turnquest also voiced optimism that the government will hit its projected 2.1 percent gross domestic product (GDP) growth target for 2021, with further expansions of 1.6-1.7 percent in subsequent years, as he slammed the Opposition leader for effectively seeking to attract - or talk The Bahamas into - a further downgrade of its sovereign creditworthiness following last week’s bleak fiscal outlook.

Mr Davis on Sunday argued that “a downgrade is for certain”, alleging that the government had sought to “gloss over and paint a picture” more optimistic than the reality of a further $1.3bn surge in the national debt to an all-time high of $9.5bn come the 2024-2025 fiscal year.

“He is certainly working his hardest to cause a secondary review,” Mr Turnquest responded yesterday, “but we have no indication of that [a further credit rating downgrade] at the moment and believe then fundamentals of the economy remain strong. We are working hard to bring these projects in the pipeline online, which will help us to offset the loss of Abaco and Grand Bahama.

“The fiscal cliff was in 2017 when we took over. We’ve made significant progress since then, and continue to work with discipline at consolidation. The trends prior to the storm support that, and we will continue with the same focus as we go forward from this hurricane.

“This [Dorian] has been disruptive, but reconstruction and the projects we mentioned should bring us back into line in terms of growth and we’re optimistic we’ll make those targets.”

Neither Standard & Poor’s (S&P) nor Moody’s, the two primary rating agencies that assess The Bahamas’ creditworthiness, have given any public indication that a further downgrade is in the offing. Indeed, S&P in early October gave The Bahamas a much-needed post-Dorian boost by asserting that this nation is “well-positioned to handle the fall-out” from the category five storm.

It added that the hurricane’s long-term impact “could be limited” despite it devastating islands that account for between 15-20 percent of gross domestic product (GDP), and said the extent of Dorian’s blow for both the economy and Bahamian sovereign creditworthiness will ultimately depend on how well the government “responds in a timely manner” to all the challenges created by the disaster.

The Bahamas currently has a (BB+/Stable/B) rating from S&P, which is one notch below so-called “investment grade”. This reflects the “junk” downgrade this nation suffered at S&P’s hands just before Christmas 2016 relating to Baha Mar’s late opening and post-Hurricane Matthew restoration costs. Moody’s still has the country at investment grade, one notch above “junk” status”

And Mr Turnquest’s position yesterday received support from Dr Allen Wright, the Inter-American Development Bank’s (IDB) country economist, who agreed that The Bahamas was not in a “fiscal crisis” despite the increased deficits and debt laid out in the Fiscal Strategy Report.

He said: “Prior to Dorian, The Bahamas was performing very well fiscally. We had seen a fiscal surplus for the first time in over a decade. How quick the government goes about in terms of executing their fiscal strategy and rectifying the situation as expected by 2021 will determine the country being in a fiscal crisis.

“Some of the things the Government can do to contain the deficit and the debt is that careful spending, improved tax collection efforts and looking for increasing efficiency in government agencies.”

Still, the Government is having to seek Parliamentary approval to borrow an extra $508m to cover the projected post-Dorian deficit of $677.5m for the 2019-2020 fiscal year. That compares to the $137m originally projected, and is close to the $690m worth of “red ink” said to have been incurred by the Christie administration during its last year in office as a result of Matthew, pre-election spending and unfunded bills.

Mr Turnquest yesterday said the Minnis administration had pursued twin goals of fiscal austerity and achieving higher GDP growth, arguing that the latter by itself is not the “panacea” to The Bahamas’ economic woes that some belief.

He added that the Government had ended “the excessive spending that the previous administration was very much guilty of”, and said: “This is a holistic approach that we’re going to take, working both sides of the ledger to achieve the results we desire as a country.”

The Fiscal Strategy Report, though, makes clear that the Government is relying on higher economic growth post-2020, coupled with last year’s upward revision to Bahamian GDP by the Department of Statistics, to keep the country’s direct debt-to-GDP ratio - which measures increases in the national debt in proportion to economic output - in check.

The report projects that the national debt as a percentage of GDP will rise from 60.4 percent at year-end 2018 to peak at 66.2 percent at year-end 2021, as Dorian reconstruction spending outpaces economic growth, only to drop to 64.7 percent at year-end 2024 as economic expansion picks up.

Tabled in Parliament last week, the Fiscal Strategy Report reveals that the Government must run a primary surplus averaging 1 percent of GDP - some $100m to $130m - per year during the five-year period between 2019-2024 if it is to bring the debt-to-GDP ratio back to the 60 percent range.

Given that excessive post-Dorian spending will dominate the first few years of that period, the report says the Government will have to “back load” its primary surplus - which measures the difference between its revenue income and non-interest expenditure - towards the end of that period.

“If the debt-to-GDP ratio is to converge back to the 60 percent of 2018, a primary surplus averaging 1 percent of GDP will have to be maintained during the 2019 to 2024 period,” the Fiscal Strategy Report said.

“As the Government will inevitably have to increase spending during the next two to three years to respond to the needs of the country following the hurricane, much of the adjustments to achieving the average primary surplus of 1 percent of GDP would have to be back loaded to the outer years.

“Given that the primary balance ratio for the period 2019 to 2021 is estimated to average -0.7 percent of GDP, back loading the adjustment to reach the 60 percent debt ratio by 2024 translates into achieving a higher primary surplus averaging 2.7 percent from 2022 to 2024.”

Mr Turnquest declined to comment yesterday when asked by Tribune Business about the feasibility of achieving such a goal, saying: “Let’s not preempt the debate. We’ll get there.”