The Tribune

• Banker: ‘Logical’ outcome ‘down the road’

• Budget ‘dependent’ on US tourism driver

• But Fed rate hikes may slow its rebound

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

New and/or increased taxes are “inevitable somewhere down the road” as greater enforcement and collection efforts will be insufficient to meet The Bahamas’ revenue needs, an investment banker warned yesterday.

David Slatter, RF Bank & Trust’s vice-president of investment management, told Tribune Business that reforms to the country’s tax structure appeared the “logical” outcome if the Government is to hit its target of increasing annual revenues by $1bn over the next three fiscal years.

He asserted that the 2022-2023 Budget was “totally dependent” on the US economy’s continued growth feeding the Bahamian tourism industry’s revival and associated revenue receipts, and said this nation cannot solely rely on external forces to escape its fiscal crisis.

Speaking after the Federal Reserve yesterday hiked short-term US interest rates by 0.75 percent, the greatest increase seen since 1994, Mr Slatter told this newspaper that while such actions may not derail Bahamian tourism they could “slow” its post-COVID recovery by making Americans - who account for 90 percent of this nation’s visitor base - cut back on spending and travel.

The US central bank’s benchmark federal funds rate now lies within a range of between 1.5 percent and 1.75 percent as it intensifies the fight against runaway inflation, and he added of the Federal Reserve’s move: “It just adds to the need to rein in spending and to have a recovery in revenues to ensure our fiscal situation does not totally depend on the recovery in tourism.

“The most recent Budget is about stimulating tourism, driving VAT revenues to meet obligations. It’s a Budget fully dependent on the US economy feeding into our tourism sector.” The Government is projecting that VAT revenues will increase by 52.4 percent year-over-year in 2022-2023 to $1.412bn, an almost $500m increase on the prior year’s $915.988m.

The Davis administration is projecting a $1bn revenue increase over the next three fiscal years, growing its income from $2.455bn in this year’s Budget to $3.539bn in 2024-2025. The post-COVID reopening and recovery is expected to generate a $537m year-over-year increase in revenue during 2021-2022 compared to the prior year’s $1.909bn, and a further $346.5m increase is projected in the upcoming 2022-2023 fiscal year.

The likes of Moody’s, the international credit rating agency, international capital markets participants and the political Opposition have all argued that such revenue projections are too aggressive to the point of being “unrealistic” amid multiple post-COVID uncertainties. However, the Davis administration has fiercely defended its forecasts and pointed to the recently “oversubscribed” $385m bond issue as a signal it still retains investor and creditor confidence.

Mr Slatter, though, noted that the unsecured Series B portion of that bond carried a 9 percent interest coupon - a rate more than two percentage points higher than that attached to previous Bahamas sovereign bond issues. “It’s pricey and not sustainable in the long run, so we have to make some changes,” he told Tribune Business.

“Our view is that it’s inevitable somewhere down the road that there will be an increase in taxation. I haven’t heard anything to support that, but it seems logical that they have to raise taxation.... Something has to give at some point. The Government is attempting to collect all the revenues due to it, as they should be doing, but that will not be sufficient going forward so at some point there has to be a change in the taxation structure of the country.

“The further you kick the can down the road, the longer you wait to make changes, makes something that could be quick and easy much more complicated.” The Davis administration’s 2022-2023 Budget relies exclusively on economic growth, and an increased volume of VAT revenue-generating transactions, coupled with a crackdown on tax delinquents via greater enforcement and compliance, to hit its revenue targets.

The Prime Minister himself has repeatedly said new and/or increased taxes are the “lazy way out”, and that such measures will only be a last resort if all else fails. The Government’s strategy appears to be to buy time, and hold off on any new taxation measures as long as possible, in order that the economy, businesses and households can recover from COVID-19.

However, sources that have privately spoken to Tribune Business have argued that there is at least a $500m ‘gap’ between the Government’s medium-term revenue targets and what it will generate from faster economic growth and compliance that will have to be filled by income from new and/or increased taxes.

Mr Slatter said the options available to The Bahamas were to raise existing tax rates, such as that for VAT, or turn to more progressive levies such as a payroll tax or personal and/or corporate income tax. The first two, he suggested, will be easier to implement while the latter will be more complex administratively.

As for the Federal Reserve’s US rate hike, the RF Bank & Trust chief said this had largely been expected and priced in by the global capital markets. US short-term interest rates are expected to rise further to at least 3 percent by year-end 2022, raising the cost of credit in a bid to dampen inflation, which has in turn raised fears that the economy upon which The Bahamas most depends is heading for a recession.

Some have even suggested that the US faces a repeat of the 1970s stagflation, with rising unemployment and prices at the same time. However, Mr Slatter said that while there were forecasts of a US recession between now and year-end 2023, the contraction was not expected to last long or be severe.

“There is the risk the tourism recovery we’re experiencing slows, but we have the benefit of our location, short flying time and the cost of the vacation is not excessive,” he told this newspaper. “That’s the main risk; the wealth effect of a stock market decline and slowdown of creation of jobs in the US spills over into our tourism industry and economy.”

Mr Slatter, though, voiced optimism that current levels of foreign direct investment (FDI) will also help insulate The Bahamas against any tourism slowdown as a result of US economic problems. And he added: “I don’t think there’s a tremendous risk of a major shock in tourism; maybe the rate of recovery slows.”

And, given that The Bahamas’ imports most of its inflation from its major trading partner, the US, any Federal Reserve success in bringing prices down will also ultimately benefit consumers and the economy here.  Suggesting that inflation may ease to 3-4 percent if the US rate hikes and other measures work, Mr Slatter said the major factor outside anyone’s control remains global oil prices.

“From a Bahamas standpoint, it’s good to see the Federal Reserve taking it seriously. Hopefully they get inflation under control sooner than later, which will bring prices down here as well,” he said.