The Tribune

• Santander: ‘No clear plan’ for $390m slash

• But hails Gov’t on ‘near-term breathing room’

• Says unlikely to go for ‘necessary tax reform’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government will find it “increasingly complicated” to hit this year’s 75 percent deficit-slash target, a major global bank has warned, while predicting this will “shift the debate back to tax reform”.

Santander, in a November 28, 2023, update for institutional investors on The Bahamas’ fiscal status, hailed the “important progress” made by the Davis administration in achieving a 2022-2023 fiscal deficit that came in below the original $564m target to give this nation some “near-term breathing room”.

However, its note warned that “the good news now might be behind us” with the Bahamian and world economy’s post-COVID reflation largely complete and this nation’s Budget lacking sufficient flexibility to make expenditure adjustments following the end to pandemic spending on subsidies and other relief.

Pointing out that debt servicing costs have increased significantly post-COVID, due to the debt blow-out that it and Hurricane Dorian produced, to now stand at 4.2 percent of gross domestic product (GDP) as opposed to 2.6 percent pre-pandemic, Santander asserted that “no clear plan” has been articulated as to how The Bahamas will achieve the magnitude of the correction it is targeting.

Openly stating that “the next phase for fiscal consolidation is much more challenging”, its report said: “The fiscal targets are now increasingly complicated on shifting a nominal -4 percent of GDP deficit to near balance this fiscal year and, still more important, consolidation to a 1.5-2 percent of GDP nominal surplus in fiscal years 2024-2025 and 2025-2026.” That amounts to a $389.5m correction, or reduction.

While agreeing that the Government’s “more ambitious trajectory” would be more beneficial to The Bahamas, in terms of easing the high interest and financing burden on Bahamian taxpayers, Santander reiterated it was “not clear” how the 2023-2024 targets will be realised given the absence of tax/revenue reform and “budget rigidity” given that most spending covers fixed costs such as salaries and rents.

“The more ambitious trajectory on fiscal consolidation would provide some welcome relief not only on the high plus-80 percent of GDP debt ratios but also the high 22 percent of gross financing needs and the high interest at 23 percent of government revenues in 2022-2023,” it added.

“The first preview to 2023-2024 shows the seasonal shift back to surplus in July 2023 but a lower surplus compared to July 2022 ($18.2m versus $41.3m). It’s not clear how the gradual consolidation will shift a 4 percent of GDP deficit to near nominal balance in fiscal year 2023-2024 at -0.9 percent of GDP.

“The official fiscal year 2023-2024 projection includes equal adjustment for a 1.7 percent of GDP increase in revenues and a 1.7 percent of GDP cutback in spending. There was no improvement on revenues/GDP this past fiscal year but, rather, the burden of adjustment was solely on lower spending.”

Santander added that breaking down government spending by category “shows decreasing marginal budget flexibility after an unwind of temporary subsidies and social benefits” following COVID-19 and “now structurally higher debt service at 4.2 percent of GDP versus 2.6 percent of GDP in fiscal 2018-2019”.

“All the spending categories are near fiscal 2018-2019 levels except for debt service,” it said. “The high proportion of debt service would argue for higher structural revenues with on/off reference to tax reform. The Budget rigidity and mature phase of cyclical recovery post-pandemic should soon shift the public debate back to tax reform.

“There is low conviction on whether The Bahamas would commit to tax reform as the necessary but politically controversial adjustment to achieve their ambitious medium-term fiscal targets.” The Davis administration has repeatedly described new and/or increased taxes as a fiscal last resort, instead prioritising economic growth, revenue enhancement and spending containment as well as new income streams.

Santander thus joins the International Monetary Fund (IMF) and Inter-American Development Bank (IDB) in raising questions over whether the Government will hit its $131.1m, or 0.9 percent of GDP, deficit target for the current 2023-2024 fiscal year that closes at end-June.

The IMF, in its statement on the annual Article IV consultation with The Bahamas, estimated that the current fiscal year’s deficit will be “considerably larger than that expected in the Budget” at a sum equal to 2.6 percent of gross domestic product (GDP).

This is almost triple the Davis administration’s forecast of a deficit equivalent to 0.9 percent of GDP or total Bahamian economic output. The IMF’s prediction, if accurate, would mean that the GFS deficit - which measures by how much government spending exceeds its revenue income - would balloon to around $378.73m compared to the Government’s $131.1m forecast.

And the IDB, in a paper tackling the doubling of its crisis funding facility for The Bahamas to $200m, estimated that “the fiscal deficit will be at around 3 percent of GDP in fiscal year 2023 and around 2 percent in fiscal year 2024”. The latter figure would peg the deficit, based on the Government’s GDP Budget estimates, at around $290m.

It remains to be seen, though, whether it is the Government or the external observers who are correct as the latter do not always get their forecasts right. Michael Halkitis, minister of economic affairs, said at end-November that the Government is “betting on our ability” to hit its fiscal targets and predicted that the Opposition and other critics will “be wrong again”.

He argued that the IMF, in particular, always took a far more conservative view of the revenue impact from enhanced enforcement, compliance and administration, believing such gains are effectively one-offs that are not recurring year after year, whereas the Davis administration’s view is more positive.

And Mr Halkitis added that the administration “have met or exceeded all of our projections”, which contrasts with its recent June and 2023-2023 fiscal year-end report. While the $533m deficit came in lower than the original $564m Budget projection, and first revised estimate of $575.4m, it was slightly higher than the final $520m estimate unveiled with May’s Budget.

Santander gave the Davis administration credit for largely meeting its 2022-2023 projections, and setting the deficit on a declining path from the $1.335bn COVID peak, although it betrayed an impatience over the timing of the June and July 2023 monthly fiscal reports by headlining its note: ‘Finally, fiscal data’.

It acknowledged, though, that “more important” than the timing was confirmation that The Bahamas’ fiscal consolidation was on track. “There was low probability for an overshoot on the Budget with the full-year target only requiring some minimal flexibility to reduce the deficit for the month of June,” Santander wrote.

“This provides some near-term breathing room with successful completion of the fiscal year 2022-2023 target and gradual progress on reducing the deficit of 5.2 percent of GDP in fiscal year 2021-2022 to 3.9 percent of GDP in fiscal year 2022-2023.....

“However, the good news now might be behind us. Already many months now into fiscal year 2023-2024, and no clear plan on how to reduce a deficit of -4 percent of GDP to a much more challenging -0.9 percent of GDP target. The high debt ratios and cash flow deficit remain vulnerable to latent shocks that validates still high 10-13 percent Eurobond yields and uncertain carry returns for 2024.”

While the Government largely achieved its 2022-2023 fiscal goals, Santander added: “There was a curious bump on non-tax revenues and an unusual decline in debt service, as well as cutbacks in capital spending and subsidies. This was enough to minimise the June deficit to $212m versus a $319m deficit in June 2022 and perform slightly better than the full-year 2022-2023 fiscal target.”

As a result, the Government’s deficit declined from $717.3m, or 5.2 percent of GDP, in 2021-2022 to 3.9 percent in 2022-2023.