The Tribune

There are two important points in time to reflect on. First, the 2022 Fiscal Strategy Report (FSR) emerged after the half-way point of the current fiscal year. Therefore, its contents ought to have been highly informed from the data available to policymakers up to that point. Second, the mid-year Budget occurred nearly two months after the six-month mark. Whatever optimism or caution the debate carried should therefore be well-informed by available data. Trends must have been confirmed or dispelled, and performance outside the period must have guided the narrative laid out in various presentations. In a sense, the level of accuracy ought to be extremely high.

Buoyed by ongoing performance, the Fiscal Strategy Report lays out an economic path for the future which is both exciting and sobering. The essence of the projections is that The Bahamas will grow its gross domestic product (GDP) to $16bn within four years, with government revenue increasing to $4bn over the same period. Loosely calculated, this translates to an average annual growth rate of approximately 5 percent.

When compared with economic growth rates of 1.5-2 percent over the last decade, it is reasonable to ask what, beyond the robust reconsolidation, does the Government have in its strategic tool-kit which will create this level of growth. Over the 15 years noted above, global growth averaged just under 4 percent. The possibilities are without doubt exciting. An examination of the Fiscal Strategy Report’s page 28 owill deliver some insight into what the administration believes are the possibilities for growth and expansion. In principle, it tends to show that there is a drive for deeper economic diversification across multiple industries.

The analysis

Before drawing any conclusion it is important to reiterate that the direction envisioned by the Fiscal Strategy Repprt is precisely what is needed for The Bahamas. Shifting from 1-2 percent average annual GDP growth to a sustained 4-5 percent will not be easily achieved, but that is exactly what the country needs. Prior to COVID- 19, one recurring point of commentary was that there was insufficient focus on economic growth at a time when there was a reasonable window to do so. That reality, coupled with the impacts from the pandemic and the accompanying global economic crisis, has led to a crystal clear understanding that the country must grow faster or struggle with its current economic and fiscal arrangements.

The growth thrust outlined in the Fiscal Strategy Report was foreshadowed in 2022 when the Ministry of Finance detailed its plans to increase government revenue to 25 percent of GDP. Careful assessment will conclude that the economic state of the country is such that it simply must find new avenues of growth. This growth in government revenue, according to the pronouncements in the Fiscal Strategy Report, is based primarily on the expansion of GDP and tax enforcement and collections. The Fiscal Strategy Report aligns well with previously made projections in the 2022-2023 Budget presentation. It suggests greater enthusiasm as opposed to any shift in outlook or strategic bearing.

It is my view that there should be a ready acknowledgment of the administration’s willingness to accept the need for growth. There should be ready acknowledgement of the boldness to lay out aggressive targets in seeking to achieve the growth objectives required. The recent mid-year Budget presentation shows central government debt is now at $11bn. Despite improvements, a review of The Bahamas’ listed outstanding foreign currency debt will show it is currently trading at reasonable discounts. This is still suggestive of above-normal premiums if compared to the US benchmark rate. This is despite recent intervention facilitated by the Government, allowing Bahamas-based investors to acquire portions of the debt. This was achieved by relaxation of the Central Bank’s exchange control requirements.

Without doubt that initiative’s overall outcome has been positive. But, as was discussed my first article, and using Santander’s recent analysis as a point of reference, the change exposes lingering challenges. This raises the question as to whether the move created any shift in credit market sentiments. Improvement in absolute terms without an underlying readjustment in the perceived risk/reward pay-off is problematic. Intuitively the outcome should not be difficult to accept as the impetus for the change was largely domestic. Any risk analysis of government debt from a local perspective is always likely to be more favourable than that which would be done by external actors. The effort was highly opportunistic and overweighted on the upside for any local player. The true impact on market sentiment is therefore inconclusive. Policymakers should watch this with keen interest.

The impact

Taken together, these issues suggest The Bahamas is not yet out of the woods as it relates to ease of access to global credit markets. Such a thinking is supported by the December monthly economic report from the Central Bank, which stated that from a fiscal perspective the risk to its outlook is that “diminished access to credit markets could constrain the fiscal capacity to stimulate the economy”. This hints at the sobering aspect of new developments. There are prominent risks which could undermine The Bahamas’ ability to achieve the targets laid out in the Fiscal Strategy Report. Its page 61 highlights the challenges faced by the administration in achieving these ambitious and important targets.

Beyond the perennial concern of “let’s hope there is no hurricane this year”, the Fiscal Strategy Report states: “Slowdown in US and global economies - economy contracts or grows at a slower pace than forecast, reduced revenue and revenue growth, increased expenditure”. And “credit rating downgrade - reduction in credit rating could increase borrowing costs and limit investors’ uptake of government paper. How about “state-owned enterprises - SOEs incur substantial losses requiring intervention”, or “pension costs - pension liabilities higher than anticipated”. Each of these are listed as possible or likely outcomes and, should they occur, each would represent a major risk to the Government’s plans. There are, of course, others with less potential impact. This is a part of the sobering context in which the Fiscal Strategy Report and the country’s economic affairs must be assessed.

This information places, in an important context, the need to sustain the momentum of performing sectors while generating growth in others. It also creates the basis for appreciating the potential headwinds, and policy choices, that the Davis administration could face should any of these materialise. It is useful to remind ourselves in this assessment that the level of resilience possible with current performance trends will take some time to emerge and harden. Regardless of the challenges and difficulties, a growth outlook remains the only viable antidote, and anything which could disrupt this should be under active scrutiny. Reforms will therefore continue to have significant influence in this regard.

The report very clearly indicates the desire to leverage other industries, such as agriculture, to drive growth. While there can be no argument with this desire, an objective assessment must question the extent to which the necessary reforms or plans will deliver sufficient early value to align with the aggressive four years’ timeline. While the Fiscal Strategy Report envisions a number of important reforms, history argues against the speed of implementation necessary to actively support the growth ambitions. One thing which is evident is that the lesser-performing sectors are likely to demand more time to become sufficiently potent so as to drive the growth envisioned by the Fiscal Strategy Report projections .

Using existing sectors as strategic platforms for expansion and diversification must be considered. The objective must be to domesticate more of the earnings from tourism and financial services. The thinking is that it is easier, and more efficient, for The Bahamas to benefit from its best assets as opposed to working harder to expand utility and gain from lesser performing possibilities. This should not be interpreted as an argument against growing the other sectors.

The private sector

The connection between economic planning and the private sector needs careful consideration. As stated elsewhere, one thing which is critical on the debates around the Fiscal Strategy Report is for the emergence of a clear plan that the private sector can “sink its teeth into”. Only the private sector can grow the economy. As noted by the Prime Minister in his recent mid-year Budget presentation, liquidity in the banking sector continues to expand. The expansion of liquidity is itself a signal of investment weakness in the domestic market. It was further pointed out that this expansion is taking place against the backdrop of poor access to credit by businesses, which is a significant constraint on economic growth. This is indicative of the fact that the private sector is in need of greater facilitation.

Given that it is the private sector that grows economies, there are important reconciliations necessary. From my perspective the answers to a few basic questions could provide great insight into how well aligned and ready we are. Where exactly are the hooks for the private sector to place its hitch, based on the outlook in the Fiscal Strategy Report? Is the general public, and therefore interested and emerging entrepreneurs, generally aware of discussions between the two sectors? Is there general congruence between the thinking outlined in the Fiscal Strategy Report and the public means of driving and facilitating private sector innovation and growth? Is there understanding and commitment between the two sectors as to the outlook and reforms needed?

Even with the most optimistic outlook, a local environment characterised by a financial market with expanding excess liquidity, and limited access to business credit, has to be worrying for policymakers. If banks are not lending then the next best use of this excess liquidity should be the reordering of the national debt by borrowing directly from depositors rather than the banks. The economic circumstance of The Bahamas is too critical to leave such monetary resources idle.

Optimism

The outlook projected by the Fiscal Strategy Report is without doubt reasonably optimistic. The optimistic view of the Government captured in the Fiscal Strategy Report was given life in the mid-year Budget debate just completed. Based on the foregoing discussion, I take the view that there is cause for looking ahead positively. Regardless of one’s outlook, I believe doing otherwise is not in the best interests of The Bahamas. As a country we must seek to move ahead strategically, pragmatically positively. We must not, however, ignore the warnings and signals, or lessen the potential of a clear and unequivocal call to action by all sectors and participants in the country’s interests.

• NB: Hubert Edwards is the principal of Next Level Solutions (NLS), a management consultancy firm. He can be reached at info@nlsolustionsbahamas.com. He specialises in governance, risk and compliance (GRC), accounting and finance. NLS provides services in the areas of enterprise risk management, internal audit and policy and procedures development, regulatory consulting, anti-money laundering, accounting and strategic planning. Hubert also chairs the Organisation for Responsible Governance’s (ORG) Economic Development Committee. This and other articles are available at www.nlsolutionsbahamas.com.