The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Moody’s last night warned of multiple “risks” to the Government’s fiscal consolidation projections due to the absence of any tax increases in the just-unveiled Budget, while spending restraint will “weigh on economic growth”.

While the narrowing fiscal deficit for the 2022-2023 fiscal year was declared to be a “credit” positive for The Bahamas, the credit rating agency asserted that “over-optimistic revenue projections” in the absence of a wider tax base and difficulties in controlling government spending “in line with targets” represent real threats to bringing the $10.5bn national debt under control.

And Moody’s suggested that the Government may have under-estimated its debt servicing (interest) costs, even if the average debt cost does not change, due to a combination of rising global rates as developed countries move to fight inflation and “the increase in risk premium” for The Bahamas’ sovereign debt as shown by the deep discounts/high yields which international investors are demanding.

The rating agency also warned that the Davis administration’s plans to restrict recurrent spending over the next three fiscal years, with slight reductions planned for 2023-2024 and 2024-2025 compared to the upcoming 12 months, could constrain the economic growth it is relying on to drag The Bahamas out of its post-COVID malaise.

“Key risks to the Budget are overly optimistic revenue collection projections in the absence of concrete measures to broaden the tax base, and the inability to manage spending in line with targets,” Moody’s analysts said in a credit note to investors. 

“Specifically, the Government expects to keep primary recurrent spending unchanged over the next two fiscal years, which would reduce real spending given 15 percent nominal growth over the same period. Also, the Government’s assumptions for interest expenditure imply a decline in the average cost of debt despite a rising global interest rate environment.”

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. Yet it unveiled no new and/or increased tax measures in Wednesday’s Budget, and is instead seemingly relying on improved economic growth and better tax compliance, enforcement and administration to get there.

Carbon credits, which have yet to materialise, are the only new revenue source discussed since the Government took office eight-and-a-half months ago, and Moody’s said: “The economic recovery is a key driver of the narrower projected deficit in fiscal 2023. A continued uptick in tourism inflows will drive the recovery at the same time as construction and foreign-led investment projects ramp up.

“These factors, in addition to increased tax collection supported by the reintroduced Revenue Enhancement Unit, underpin the Government’s expectation that recurrent revenue will expand by 28.6 percent by fiscal-year-end 2022 and 14.1 percent in fiscal 2023.” 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.

A further $346.5m increase is projected in the upcoming 2022-2023 fiscal year, and Moody’s added: “Although these factors are supportive for increased revenue in fiscal 2023, the Budget did not include an increase in taxes, posing risks to the Government’s medium-term projections.

“Without an increase in taxes, the Government projects that recurrent revenue will reach 24 percent of GDP by fiscal year-end 2025, 4.4 percentage points higher than fiscal 2022, and 5.4 percentage points more than in fiscal 2019. As we have noted previously, the Government’s revenue assumptions may prove overly optimistic, leading to a more gradual fiscal adjustment.”

As for spending, the Davis administration is forecasting that fixed-cost (recurrent ) expenditure will peak at $2.997bn in 2022-2023 before declining to $2.952bn in 2023-2024 and then to $2.918bn in 2024-2025. “On the expenditure side, the Government projects that recurrent primary expenditure growth will be close to unchanged over the next three years,” Moody’s said. 

“Following accumulated growth of 31 percent in fiscal 2018 [through to 2021], the Government projects recurrent primary expenditure growth at less than 1 percent in fiscal 2022, declining by 1.1 percent in fiscal 2023 and growing less than 1 percent annually in fiscal 2024-2025.

“The restraint in spending, and with higher revenue, will narrow the deficit. While we expect the Government to constrain expenditure growth, the magnitude of the reduction in spending implies a much more restrictive fiscal policy stance, which will weigh on growth.”

Moody’s added that the Government is also estimating that its debt servicing costs will peak at $589m in 2022-2023, before declining in following years - something that runs counter to the rise in global interest rates to combat inflation. “The Budget projections suggest interest payments will peak in fiscal 2023 at 21 percent of revenue,” the rating agency added.

“Considering that financing needs and liquidity risk will be elevated over the next two years, with gross financing needs averaging more than 20 percent of GDP in fiscal 2023-2024, an increase in borrowing costs would increase interest expenditures and result in a larger fiscal deficit.

“Given the rise in interest rates globally, and the increase in risk premium for the Government of The Bahamas’ debt, even assuming an unchanged average cost of debt would imply higher interest expenditure than the Government projects.”

Tribune Business reported earlier this week that The Bahamas’ $825m bond, which has an 8.95 percent interest coupon and is set to mature in 2032, closed trading on the Frankfurt stock exchange at a more than 25 percent discount to its face value. The yield demanded by investors was just over 14 percent, indicating that the global capital markets still view The Bahamas as ‘high risk’ and would demand double digit interest rates in return for investing in any new debt issues.

It is a similar story with the $300m bond, carrying a 6.95 percent interest coupon, that is set to mature in 2029. It, too, closed at a 25 percent discount to face value with the yield set at slightly over 12.5 percent.

Still, Moody’s said the drop in the Government’s fiscal deficit to the predicted $564m in the upcoming fiscal year, as opposed to $758.6m for 2021-2022, represented an improvement. “The fiscal 2023 Budget narrows the fiscal deficit to 4.3 percent of GDP from around 6 percent of GDP in fiscal 2022, and 13.7 percent of GDP in fiscal 2021,” Moody’s said.

“The strong pace of economic recovery supports the Government’s projections for faster fiscal consolidation than a year ago, a credit positive. Fiscal consolidation in fiscal 2022 is offset by a slightly larger deficit in fiscal 2023, with government projections for a smaller fiscal deficit in subsequent years. Overall, the fiscal trajectory will reduce debt to below 80 percent of GDP by fiscal 2025, still elevated but down from 101 percent in fiscal 2021.”

Moody’s said the present year’s fiscal deficit would have been much reduced if not for an overhang of arrears left by the former Minnis administration. “Government spending likely increased in fiscal 2022 because of clearing arrears left by the prior administration. Stronger revenue collection more than offset the increased spending, resulting in the fiscal deficit narrowing to 6 percent of GDP in fiscal 2022 from 7.4 percent based on the medium-term fiscal outlook,” the rating agency added.

“In the first nine months of fiscal 2022, revenue was $1.85bn, a 50 percent increase versus fiscal 2021. The favourable results, supported by post-pandemic normalisation of economic activity and tourism inflows, led to a $210.6m increase in the fiscal 2022 revenue estimate.

“This offset a roughly $251m increase in spending (relative to the December supplementary budget) to pay down arrears and other unsettled claims of around $1bn (nearly 8 percent of GDP) at year-end 2021. Without the increased spending, the projected deficit for fiscal 2022 would have narrowed to 4 percent of GDP.”