The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Standard & Poor’s (S&P) yesterday slashed its 2023 economic growth forecast for The Bahamas to just 1.1 percent despite giving the country a break on repeated annual creditworthiness downgrades.

The rating agency, which maintained its existing ‘B+’ credit rating and ‘stable’ outlook for the country, based its prediction on growing global risks and headwinds from continued inflationary shocks, a likely US recession and persistent post-COVID supply chain challenges. And it also warned that The Bahamas’ ambitions to become a major digital assets hub “may face setbacks” due to the FTX crypto currency exchange’s collapse.

S&P’s forecast, which represents almost a three-quarters or 75 percent cut to the latest International Monetary Fund (IMF) estimate of 4.1 percent gross domestic product (GDP) growth for The Bahamas in 2023, also comes as the nation’s tourism industry enjoys the momentum from a strong post-pandemic rebound.

“The economy is expected to increase by 8 percent in 2022, with slower growth expected in 2023,” S&P said yesterday. “As expected, The Bahamas is experiencing a strong recovery in the tourism sector. The country is benefiting from its proximity to its largest tourism source market and pent-up demand.

“Stayover arrivals for 2022 are expected to exceed 80 percent of 2019 levels. Furthermore, we understand there is a pipeline of tourism-related projects planned and under way over the next few years. Although we expect these projects will continue to support growth, they reinforce the economy’s dependence on the volatile tourism sector. The Bahamas’ economy remains concentrated in tourism, which typically contributes at least 40 percent of GDP.

“We expect global economic challenges in 2023 will slow The Bahamas’ real GDP growth next year to 1.1 percent. We expect GDP per capita will be $33,740 in 2023. The pandemic, low historical growth and repeated natural disasters have weighed on the country’s economy,” the rating agency continued. 

“Despite good growth over the next two to three years, our assessment of the sovereign’s creditworthiness reflects its below-average long-term growth performance compared with that of others at a similar level of development.” S&P’s assessment reflects the increasing global economic headwinds that are buffeting this nation through the cost of living crisis and other impacts.

And, noting that digital assets represented a key part of the Davis administration’s strategy to grow and diversify the Bahamian economy, S&P said FTX’s collapse could derail or hinder these objectives due to the reputational fall-out for the jurisdiction.

While asserting that the FTX failure will have “no material adverse impact” for the overall economy and sovereign credit rating, the rating agency added: “To foster the local Fintech (financial technology) sector and open the country to opportunities in the digital asset space, the Government recently introduced the Digital Assets and Registered Exchange (DARE) Act.

“The local economy benefited from the activities of a digital exchange over the past year. However, this sector may face setbacks as FTX, a digital asset exchange headquartered in The Bahamas, recently filed for bankruptcy.” S&P also suggested that the Davis administration is unlikely to undertake “significant public finance reforms in the next one to two years”, with economic recovery set to be the main driver of lower deficits and increased revenues.

It argued, though, that “material new revenue” sources, meaning new and/or increased taxes, will be needed if the Government is to meet its fiscal targets - something the Prime Minister has repeatedly pledged will only be a last resort option given the administration’s focus on monetising blue carbon credits.

“The Bahamas has faced two large negative shocks in three years, placing significant pressure on government finances and testing the Government’s resolve to put the nation’s finances on a sustainable path,” S&P said. 

“The rapid increase in debt over the past few years means The Bahamas’ previous fiscal consolidation plans will likely be insufficient to meet the country’s debt targets without material new revenues, significant cost cutting or economic growth well above historical averages. Furthermore, the country remains vulnerable to environmental risks.

“We believe the country’s track record of slow progress in reforming public finances and key sectors of the economy has contributed to the weakening of its financial profile over many years and hurt its economic performance. Most notably, failure to advance public financial reform has led to a marked increase in the sovereign’s debt burden.”

The economy’s post-COVID reflation, S&P added, was slowing increases in The Bahamas’ gross sovereign debt but the Government still has “significant financing and refinancing needs. External borrowing and high current account deficits will continue to pressure The Bahamas’ external position”.

“The growing economy is helping to reduce the Government’s fiscal deficits to levels more consistent with those seen pre-pandemic. We expect the deficit this fiscal year (ending June 30, 2023) will be 2.8 percent of GDP, and that the change in general government net debt will average 2.4 percent of GDP during 2022-2024,” S&P said.

“In the short-term, we do not anticipate material new revenue-generating tax measures. Instead, we expect the Government will continue pursuing improvements to tax collections via a dedicated Revenue Enhancement Unit, among other initiatives. In the past fiscal year, the Government rolled out its updated real property tax roll, which added new properties, and it expects it will generate $120m per year.”

Asserting that the Government’s bid to achieve a 25 percent revenue-to-GDP ratio by 2025-2026 will be a tough ask without new and/or increased taxes and spending cuts, S&P said: “The Government has announced its intention to collect revenue of 25 percent of GDP, while shrinking expenses and capital spending to 20 percent and 3.5 percent of GDP, respectively, by fiscal 2025-2026.

“This would result in a fiscal surplus. However, we believe the Government’s goals will be hard to achieve absent new taxes or material spending cuts. The Government has announced two new committees to review revenue policies and public debt strategy. Any recommendations and new policies arising from these committees will take several years before they have a meaningful impact on public finances.”

With The Government’s net debt burden and financing needs set to decline slowly, S&P argued it “remains vulnerable to refinancing risks” with 24 percent of its debt due to mature over the next year - albeit the majority of this is held by domestic investors and denominated in Bahamian dollars.

“We expect The Bahamas will refinance existing domestic debt internally, but will rely on external sources to meet its incremental borrowing needs. We understand the Government plans to avoid external bond markets in 2023. Instead it will use a combination of bank loans and multilateral funding to meet its external financing needs,” the rating agency added.

“The country’s external debt has risen in recent years, and foreign currency-denominated debt is now 46 percent of total debt, underscoring the importance of generating sufficient foreign exchange to meet debt service needs.”