The Tribune

• Moody's: Fiscal targets depend on 'revenue base broadening'

• Warns 'the major risk' for Bahamas is $1.9bn debt refinancing

• Banker: Message must be 'tax rises, but in equitable manner'

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Moody's yesterday asserted that hitting the Government's fiscal targets "rests on broadening the revenue base" as a prominent banker urged the administration: "Stop saying no new taxes."

The credit rating agency, in a relatively upbeat assessment of the 2023-2024 Budget based on the projection that next year's fiscal deficit will shrink by 75 percent to $131m, warned that "the major risk" facing The Bahamas is the potential difficulties it will encounter in refinancing some $1.9bn of maturing debt at reasonable interest rate costs.

Noting that these refinancing needs, equivalent to 14.3 percent of Bahamian gross domestic product (GDP), will come due in the 2023-2024 fiscal year, Moody's said the Davis administration will "need to find alternative financing sources" given that international capital markets are effectively closed to it due to the high interest rate environment.

The latest analysis by the credit rating agency, which in October 2022 downgraded The Bahamas' sovereign creditworthiness from 'Ba3' to 'B1' in October 2022, came as Gowon Bowe, Fidelity Bank (Bahamas) chief executive, urged the Government to drop the 'no new or increased taxes' messaging given the country's fiscal position.

He instead argued that it should prepare the Bahamian people and businesses for the eventual possibility of new taxes, but reassure that these will be implemented "in a manner that is more bearable and equitable" through being linked to ability to pay.

With the Government having already launched consultation on a corporate income tax through the recently-released 'green paper', Mr Bowe also voiced concern that the Budget and subsequent commentary had "fallen on the xenophobic side" by portraying all new and/or increased taxes, fees and levies as being imposed solely on foreigners rather than Bahamians.

He warned against creating an "us versus them" mentality just as Prime Minister Philip Davis KC, in leading-off the Budget debate in the House of Assembly, reiterated that his administration has "made extraordinary efforts to protect Bahamians from any new revenue measures" and that "95 percent of new revenue will come from non-Bahamians" during the 2023-2024 fiscal year.

Moody's, in describing the 2023-2024 Budget as "a credit positive", said the lower fiscal deficit for the upcoming fiscal year - and forecast fiscal surplus for 2024-2025 - will slow the national debt's growth before starting to reduce it albeit slowly from the forecast $11.74bn peak.

"The Government's fiscal projections through fiscal 2027 are aligned with the Government's fiscal responsibility targets," Moody's said. "The Government targets a reduction in government debt-to-GDP to no more than 50 percent by fiscal year 2030-2031, along with a 0.5 percent of GDP fiscal surplus. Fiscal consolidation rests on broadening the revenue base. The Government targets raising revenue to 25 percent of GDP" by fiscal year 2025-2026.

The rating agency did say whether, in its opinion, "broadening the revenue base" involves the introduction of new and/or increased taxes. However, it hailed the Davis administration's post-COVID revenue performance to-date, with the Public Treasury's forecast income for the 2022-2023 fiscal period set to come in $107.8m above projections.

"Revenue growth also reflects government efforts to improve tax compliance and efficiency through administrative reform and enhanced revenue collection. The strong revenue numbers are also noteworthy since the Government has explicitly stated that it does not intend to add new taxes or increase existing taxes," Moody's said.

"The Government is committed to maintaining tight control on expenditure. Recurrent and capital expenditure will both grow slowly in the coming years, but recurrent revenue is projected to increase 37.7 percent between fiscal 2022-2023 and 2026-2027." The Fiscal Strategy Report is projecting that revenues will expand by almost $1.2bn over that period to hit a target just shy of $4bn.

However, Moody's argued that the Government's greatest short-term fiscal challenge lies in refinancing some $1.9bn worth of debt principal that is set to mature during the 2023-2024 fiscal at a reasonable interest cost to Bahamian taxpayers. Global interest rate hikes, as central banks seek to combat inflation, have negatively impacted The Bahamas' external borrowing costs and effectively closed the foreign currency bond markets to it.

This is likely why the Prime Minister, in last week's Budget communication, placed such emphasis on reforming and broadening the Bahamian dollar capital markets domestically. Moody's said of the Government yesterday: "Interest payments are projected to grow over the coming years and will be higher than expected.

"The major risk for the sovereign [The Bahamas] centres on challenges in financing and refinancing its upcoming maturities. Even with a narrowing fiscal deficit that turns to a surplus in fiscal 2025, the Government faces large gross financing needs. The Government will see a peak in maturities due in fiscal 2024, when gross refinancing needs reach 14.3 percent of GDP.

"Although the Government doesn’t intend to access international bond markets through commercial issuance, it will need to find alternative financing sources to repay upcoming external amortisations amid still tight financing conditions. Refinancing upcoming maturities at higher borrowing costs would weigh on the Government's debt affordability."

The Ministry of Finance's last debt bulletin, issued in April 2023, showed almost $1.9bn in debt principal as coming due during the upcoming 2023-2024 fiscal year. While some $1.029bn is owed to domestic creditors, with most likely denominated in Bahamian dollars, some $868.2m is owed externally and likely denominated in US dollars or other foreign currency, which could impose pressures on the foreign currency reserves.

Mr Bowe, though, said the Government's tax-related communications need to change. "I still believe the Prime Minister, in his role as minister of finance, has a responsibility not to suggest to people that the Government is not going to tax you any further," he told Tribune Business. "I think the message has to be that we're going to increase taxes, but in a manner that is more bearable and equitable."

While the Prime Minister promised no new and/or increased taxes when it came to VAT, real property tax, Customs and Excise duties and other major revenue streams, the 2023-2024 Budget still imposed multiple fee increases that are primarily targeted at who the Government perceives to be wealthy foreigners - cruise passengers with departure tax rises and additional levies; boat owners via a multitude of fees; and a rise in the real property tax cap to $150,000.

"It fell on the xenophobic side," Mr Bowe added. "It's more foreigners than Bahamians. That's the wrong message. It should be that we're going to increase taxes on everybody, but on a more equitable basis, where we take from those that have more and take less from those that have less. Then we don't get into 'us versus them'.

"We rely on foreign direct investment. It doesn't mean we always need foreign investors, but we rely on foreign direct investment. From that perspective, we cannot create xenophobia, 'us versus them', intentionally or unintentionally."

Mr Bowe, who headed the Coalition for Responsible Taxation (CRT) when VAT was introduced in 2015, said the 2023-2024 Budget numbers had not altered significantly from what was originally projected, which will give observers confidence that the Government is sticking largely to its targets and fiscal strategy.

"The big thing is going to be the outturn of the deficit for the current year and if there is further slippage" before end-June. The Government is projecting that the 2022-2023 deficit will now come in some $54.8m below forecast at $520.6m, driven by a better-than-expected $2.909bn revenue performance.

However, Mr Bowe warned that June is traditionally "a relatively dry month" given that tourism activity is slower, and the bulk of Business Licence fees and real property taxes have already been collected. In addition, spending often spikes as government ministries and departments present bills no one knew anything about for payment before year-end.

Asked whether the 2023-2024 fiscal forecasts are realistic, Mr Bowe said the Government's tax collection and enforcement efforts have the capacity to make up for any slippage in new revenues. "I think the revenue one still remains to be borne out," he added of the projected $400m increase.

"If they come in at $500m and some this year [on the deficit] there's greater credibility, but in order to achieve the deficit reduction they say they will, they have to have the revenues. It's doable because if they collect some of the back taxes, if there are any issues with new revenue sources they could make that up.

"While everything hinges on the revenue increase there is, if you will, a treasure trove of back taxes that, if they are able to excavate that from the underground tomb they are buried in, they should be able to meet that target. The question is whether they will be able to repeat that in subsequent years when they don't have that treasure chest of back taxes to access," he continued.

"If they have the ability to continue to extract more back taxes, that's not going to mean the future is secured, some tax reform is going to be urgently needed. One word of advice: Stop saying there will be no new taxes. Say there will be new taxes, but we're looking for a more equitable system."