The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Moody’s has doubled down on concerns that the Government’s Budget revenue forecasts are “overly optimistic” and that its debt servicing payments will be higher than projected due to the rise in global interest rates.

The credit rating agency, fresh from downgrading The Bahamas deeper into so-called ‘junk’ status over concerns the Government may be unable to access the debt financing it requires, also suggested that the Davis administration’s plans to restrain public spending “will weigh on growth” and thus slowdown economic expansion.

Issuing its latest ‘credit opinion’ on The Bahamas just one day after cutting the country’s credit rating ‘B1’ from ‘Ba3’, Moody’s reiterated previous concerns and misgivings voiced over the Government’s 2022-2023 Budget projections by suggesting “additional revenue measures” - coded language for new and/or increased taxes - may well be needed to hit its goal of eliminating the annual fiscal deficit by 2024-2025.

“The economic recovery is a key driver of fiscal consolidation 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 re-introduced Revenue Enhancement Unit, underpin the Government’s expectation that recurrent revenue will expand by 14.1 percent in fiscal 2023,

“The Government projects that recurrent revenue will reach 24 percent of GDP by the end of fiscal 2025, 4.4 percentage points higher than that estimated in 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, requiring either additional revenue measures or a more gradual fiscal adjustment.”

Similar warnings were repeated with regard to the Government’s spending forecasts. “On the expenditure side, following accumulated growth of 31 percent in fiscal 2018-2021, the Government projects recurrent primary expenditure will decline by 1.1 percent in fiscal 2023 and grow less than 1 percent annually in fiscal 2024-2025,” Moody’s said.

“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.” The Davis administration is forecasting that recurrent spending, which covers the Government’s fixed costs such as salaries and rents, will peak this fiscal year at $2.997bn and thereafter be held relatively flat at $2.953bn and $2.918bn over the next two successive budget years.

As for interest payments, or debt servicing, which has become the single biggest line-item in the Government’s Budget, Moody’s challenged its projection that these will peak as a percentage of revenue this fiscal year. “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 high 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 expenditure 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.” The Budget projected that the Government’s interest costs will peak at $588.988m this fiscal year, before declining to $542.248m and $487.153m in 2022-2023 and 2023-2024 respectively.

Meanwhile, Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business that last week’s downgrade by Moody’s will “have some very practical implications”, including for financial institutions such as banks, pension funds, insurance companies and mutual funds that invest heavily in government debt.

These will now have to further discount, or impair, existing government debt holdings worth hundreds of millions of dollars. Branding The Bahamas’ downgrade as “not wholly unexpected”, Mr Bowe added: “It’s going to be critical for us not to focus on the downgrade, but focus on the actions we will take to restore greater confidence going forward.

“There are what I’m going to say are some very practical implications. Holders of government securities, in their financial statements, are going to be required to take further provisions - although I call it paper losses for the time being - because there’s not been any actual default.

“There’s a greater uphill battle now in terms of conversations with investors. Although the sophisticated investors will do their own analysis, the reality is those looking at external information will certainly have this information in their hands.”

The Ministry of Finance last week suggested the Moody’s downgrade, which was based on fears that The Bahamas’ access to borrowing is being squeezed, is not warranted because the Government’s borrowing plan for the 2022-2023 fiscal year shows it is aiming to avoid the global bond markets over the next nine months due to the adverse high interest rate environment it would face.

Mr Bowe, though, said: “I would implore the Government not to get into a response that looks to criticise the deficiencies or a process that is inequitable. What it needs to focus on is the messages that have been created, and appreciate the role of government now is to demonstrate an alternative position that is viable and we will efficiently navigate the coming years with prudence and some creativity.”

The Davis administration will likely argue that Moody’s analysis, and action, was premature and that it should have waited at least 12 months to determine whether the Government had hit its fiscal forecasts for 2022-2023. This is especially since, in the subsequent ‘credit opinion’, the rating agency projected that The Bahamas will hit 7 percent gross domestic product (GDP) growth for 2022.

“Although the outbreak of the Omicron variant of the coronavirus dampened the tourism sector’s recovery in the beginning of the 2021-2022 high season of December to April, there are signs that the sector is regaining momentum. In the first half of 2022, the country has received nearly three million visitors, equal to about 85 percent of the arrivals recorded in January to June in 2019,” Moody’s said.

“Notably, the number of stopover arrivals has consistently exceeded the figures from 2021. Stopover visitors - visitors who are confirmed to have spent a night in The Bahamas based on immigration records - generate 90 percent of tourism earnings despite accounting for less than half of total arrivals. The arrivals of stopover visitors reached 71 percent of their 2019 pre-pandemic level in June 2022.

“At the same time as stayover arrivals regain momentum, cruise arrivals are picking up significantly. Through the first six months of 2022, visitor arrivals from cruise ships totaled 2.2m, equal to 78 percent of the number of cruise visitor arrivals recorded in the same period in 2019, a record year for cruise arrivals. The authorities expect cruise visitors to surpass 5m in 2022, and exceed that number in 2023, which would likely mark a record-breaking year for cruise tourism arrivals,” Moody’s continued.

“Assuming that the tourism sector carries this momentum through the upcoming peak season, economic activity will continue to pick up. We forecast real GDP growth of 7 percent in 2022. Although the sector’s recovery, which will support the broader economy’s growth, is subject to risks of inflation in tourism source markets and a potential outbreak of a new coronavirus variant, we expect inflows to continue to converge with their pre-pandemic levels in the remainder of 2022.”