The Tribune

• Minister: Fiscal goals ‘realistic’ and ‘achievable’

• But Gov’t must ‘hold the line’ over expenditure

• Can’t say ‘oops’ and be ‘flat-footed’ on shocks

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas must “hold the line” on government spending to build investor confidence that it is not solely relying on economic growth “to fund any errors” in its fiscal projections, a well-known banker urged yesterday.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business that Moody’s assessment that the Government’s spending targets will “prove challenging” reflects the failure of past administrations to eliminate wasteful expenditure - especially during periods when revenue flows are relatively strong.

The Davis administration is seeking to control restrain total spending growth to 12.2 percent, or just over $390m, across the next four fiscal periods as it bids to hold fixed-cost expenditure at a level equivalent to 20 percent of gross domestic product (GDP) by 2020. Moody’s, though, suggested such a goal may be too optimistic given inflation’s impact on government spending, as well as The Bahamas’ vulnerability to natural disasters, recessions and other external shocks.

Mr Bowe, though, told this newspaper that the Government would likely itself concede that the Fiscal Strategy Report’s forecasts are “optimistic”, although this does not mean they are unattainable or unrealistic. “I think that if we heard the Government deny these elements are optimistic that would be concerning,” he said.

Michael Halkitis, minister of economic affairs, echoed that very same position at yesterday’s Prime Minister’s Office media briefing when he said “we have to be optimistic” about The Bahamas’ economic and fiscal outlook. Agreeing to some extent with Moody’s analysis, he agreed that the Davis administration’s estimates are “optimistic” but reiterated that they are “realistic” and “quite achievable”.

“We think they are achievable,” the minister said of the Fiscal Strategy Report objectives. “As a matter of fact, this administration since coming in has met our projections or exceeded our projections. Moody’s thinks they’re optimistic, but quite rightly we think we can achieve those.”

Mr Halkitis argued that fears of a deep, protracted US recession were now “beginning to recede into the background”, which provides further encouragement for The Bahamas and its tourism-driven economy given that presently more tan 90 percent of visitors come from North America.

“Our problem is we don’t have enough rooms to hold the people, so we will be looking at assisting those operators to bring those rooms” back on line, he added, seemingly referring to the still-closed Melia and British Colonial properties. “Our investment pipeline is very strong and spread throughout the islands,” the minister said.

Conceding that the Government needs to have “more conversations” with Moody’s, given that the rating agency is more hawkish on The Bahamas than its rival, Standard & Poor’s (S&P), Mr Halkitis said of the estimates: “Yes, they are optimistic, but we believe they are realistic and they are quite achievable.”

Noting that the mid-year Budget, which is due to be unveiled before end-February, will disclose the Government’s fiscal performance for the 2022-2023 first half, he added: “Revenue collection has not always been the problem. By and large, taking out COVID and Dorian’s aftermath, revenue performance is within reason. The bigger issue is unexpected expenses, and having to support state-owned enterprises (SOEs) and emergencies that come up and having an archipelago.

“I think we’re optimistic, but we have to be optimistic. Our record shows we’ve been achieving targets and we will continue to achieve them.” Besides spending, the Davis administration is also forecasting that it will grow revenues by almost $1.2bn over the next four fiscal years through to 2026-2027.

Mr Bowe yesterday said Moody’s verdict comes as little surprise. “I don’t think the Moody’s report causes concern for us because the realities are known to all parties,” he told Tribune Business. “The point being expressed, if answered frankly, the Government would express the same view that it’s optimistic. I think if we heard the Government deny these elements are optimistic, that would be concerning.”

“It’s not to say it’s unachievable or unrealistic, but based on our historical our performance with revenue-to-GDP at percentages of the past and, more importantly, there being some sensitivity with the GDP numbers. The Government has to demonstrate the projections are based on modelling that shows sensitivity as to what the outcomes will be.”

The Fidelity Bank (Bahamas) chief said The Bahamas needed to develop a range of potential economic scenarios, ranging from the most optimistic to the very worst, so that it is not “caught flat-footed” by unexpected shocks. “We as a country need to focus our attention on ‘what if’ scenarios so that we are not caught flat-footed if our optimism is not realised,” he argued.

“We can’t wait until something is not achieved and ‘ooops’. We need to prepare ourselves for the base case, which may be optimistic in its modelling assumptions, but also prepare for the worst case and best case so we demonstrate to international observers we have prepared for all outcomes within a reasonable time profile.”

Mr Bowe, however, said the Government cannot afford to use increased revenues to simply boost its spending. He argued that public expenditure needs to be viewed in absolute terms, as opposed to a percentage of GDP, to help prevent this.

“Moody’s is highlighting the optimism that the Government can contain its spending even with elevated revenues,” Mr Bowe said of the Fiscal Strategy Report’s projections. “That is based on past performance, where expenditure has been less than favourable and we’ve not demonstrated our ability to control expenditure. There’s a need to hold the line.

“We need to get into absolute projections. If we’re saying expenditure is going to be $3bn, that number is not allowed to increase as GDP increases. I’d rather expenditure projections be an absolute amount. We then know if revenues are not met it will not impact what the deficit will be as opposed to relying on GDP growth to find any errors in forecast.”

Moody’s, in its analysis of the Fiscal Strategy Report forecasts, said: “The Government’s target to keep expenditures broadly unchanged for the next four years compared with fiscal 2022 could prove challenging, particularly in light of higher food and energy prices that would imply a significant reduction in government spending in real terms.

“The Government’s capital budget, which targets an increase to 3.5 percent of GDP in fiscal 2026 compared with 2.3 percent of GDP in fiscal 2022, provides some room to adjust spending in response to lower revenue.”

Noting that revenue projections have been revised upwards, Moody’s added: “Given The Bahamas’ small size, exposure to weather-related shocks and concentrated economic structure reliant on tourism, real GDP growth has been volatile in contrast to the Government’s projections for a steady growth.

Meanwhile, Hubert Edwards, the Organisation for Responsible Governance’s (ORG) economic committee development head, yesterday agreed that the Government’s fiscal and economic goals “need to be” optimistic to drive the necessary economic expansion.

He added, though, that it was critical for the Government to hit its targets given that Moody’s will likely return to assess how well The Bahamas is faring against these benchmarks. And it was also important for the Davis administration to reduce debt servicing costs through lowering the interest rates attached to The Bahamas’ debt.

“The Government will also rely on lower interest expenditures, which it projects will decline by more than one percentage point of GDP over the forecast horizon. Although a declining debt burden will help reduce the interest bill, the Government is relying on a reduction in the cost of debt,” Moody’s said.

“The Government expects the average nominal interest rate to decline to 4.86 percent in fiscal year 2026, down from 5.55 percent in fiscal year 2022, and lower than the 5.2 percent assumed in the fiscal 2023 budget. Without a significant change in the maturity profile of government debt, lower interest expenditures would likely require replacing expensive outstanding debt with lower-cost borrowing or a significant reduction in borrowing costs going forward.

“Rising external borrowing costs, particularly for commercial debt, have been a key driver of the deterioration in The Bahamas’ debt affordability. If the Government were to reduce its commercial borrowing, either through increased reliance on domestic financing or through greater use of multilateral funding including credit enhancements, it would help contain borrowing costs.”