The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Standard & Poor’s (S&P) last night argued that the Government will likely struggle to meet its debt reduction targets “without material new revenues, significant cost-cutting or well above average economic growth”.

The rating agency, in its country report on The Bahamas that made no change to this nation’s creditworthiness, said the debt blow-out produced by Hurricane Dorian and the COVID pandemic means the Government’s “previous fiscal consolidation plans” are insufficient to achieve its fiscal goals unless economic growth is strong enough to avoid the imposition of further austerity measures.

Joining the Moody’s and the Inter-American Development Bank (IDB) in warning that The Bahamas faces “elevated” external financing risks, with the Government requiring $2.1bn during the present 2023-2024 fiscal year to refinance maturing debt, S&P nevertheless hinted it was optimistic that it will source the necessary funding to cover the $300m foreign currency bond coming due for repayment in January 2024.

Suggesting that the annual fiscal deficit will fall more slowly than the Government’s projections, finishing the current fiscal year at 3.2 percent of gross domestic product (GDP) as opposed to the forecast 0.9 percent, the rating agency noted that the Davis administration is aiming to generate an extra $120m per year in revenue through an improved real property tax roll and better enforcement/collections.

However, it then warned that “material spending cuts will be more difficult to implement if they become necessary”, pointing to the “drain” imposed by subsidies to loss-making state-owned enterprises (SOEs) which consume 15 percent of the Government’s total annual expenditure.

“We believe the country’s record of slow progress in reforming public finances and key economic sectors has weakened its financial profile over the long-term and hurt its economic performance,” S&P said of The Bahamas. “The Bahamas has faced two large negative shocks (Hurricane Dorian in 2019 and the pandemic in 2020), resulting in a significant rise in government debt and testing the Government’s resolve to put the nation’s finances on a sustainable path.

“The rapid increase in debt in recent years means the Government’s previous fiscal consolidation plans will likely be insufficient to meet its debt targets without material new revenues, significant cost cutting or economic growth well above historical averages. Furthermore, the country remains vulnerable to environmental risks.”

The Bahamas’ national debt increased by $457.5m over the prior 12 months to close the 2023-2023 fiscal year at $11.645bn at end-June. The Government’s 2023-2024 Budget projections have its debt peaking at $11.74bn in the current fiscal, before the attainment of consecutive annual fiscal surpluses starts to set this on a downward path back to the target 50 percent debt-to-GDP ratio by 2030-2031.

However, S&P indicated it is forecasting that any improvement in the Government’s fiscal health will be more gradual. Its comments also suggest that austerity measures may be required, via spending cuts, new and/or increased taxes or a combination of both, if higher economic growth fails to materialise and revenue and deficit targets are not hit.

“We expect that fiscal deficits will continue to decline and the pace of nominal debt growth will slow, translating into a gradual reduction of our net debt-to-GDP ratio, although the interest burden will remain high. The expanding economy is supporting government revenues, which increased almost 12 percent in the most recent fiscal year,” the credit rating agency added.

“While some of the pandemic-related programmes are ending, the interest burden, combined with other spending rigidities, including state-owned enterprise (SOE) outlays, continues to weigh on expenditures. We expect the deficit to reach to 4.6 percent of GDP in fiscal year 2022-2023, and to further fall to 3.2 percent in fiscal year 2023-2024.

“Although The Bahamas’ debt burden rose following Hurricane Dorian in 2019 and the onset of the COVID-19 pandemic in 2020, a growing economy and smaller deficits have resulted in slower nominal debt growth. Interest expenses are higher than pre-pandemic levels and we expect the country’s interest burden will remain above 15 percent of revenues in the next one to two years.”

S&P’s projected 2023-2024 deficit is more than three times’ higher, as a percentage of GDP, than the Government’s 0.9 percent or $131m. The rating agency, though, sounded a note of cautious optimism over The Bahamas’ prospects of meeting the Government’s $2bn-plus financing needs for 2023-2024, with this sum required to rollover and refinance maturing debt issues.

“We think that external financing risks remain elevated for The Bahamas, but a large domestic financial sector and multilateral external funding should mitigate this risk. The Government’s gross financing needs are close to $2.1bn for fiscal 2023-2024, although most of the new debt will go to the rollover of existing debt,” S&P added.

“We expect the Government will raise more than half of its financing domestically, which we consider viable at current levels given limited lending alternatives for domestic banks. The Government has a $300m bond coming due in January 2024.

“We anticipate that it will source the remaining financing needs externally through the international bank market, underpinned by multilateral credit enhancements as well as direct multilateral lending, and will not access external bond markets, which could further weigh on the interest burden.” That will rely heavily on guarantees and other instruments provided by the likes of the Inter-American Development Bank (IDB) to make financing accessible at relatively low interest rates.

“We expect declining deficits and a growing economy will lead to a slow decline in The Bahamas’ net debt burden and financing needs. However, the country remains vulnerable to refinancing risks based on its significant short-term debt, with almost 28 percent of debt maturing in the next year, although the Government expects this will be largely rolled over in the domestic market,” S&P reiterated.

On the deficit front, the rating agency forecast that the change in general net government debt will average 2.1 percent of GDP between 2023 and 2025. “The growing economy continues to support the reduction of the Government’s fiscal deficits to levels more consistent with those seen pre-pandemic,” S&P added.

“In the next 12 months, we don’t anticipate material new revenue-generating tax measures, and expect the Government to rely on growth to provide enough buoyancy to revenues to support the budgetary outturn. Improvements to tax collections (via a dedicated Revenue Enhancement Unit, among other initiatives) and its property tax roll (through which it expects to generate an additional $120m a year) should support fiscal performance over the next few years.

“On the other hand, we believe that material spending cuts will be more difficult to implement. Efforts going back many years have failed to reform the country’s SOEs, which remain a drain on government finances. The Government typically spends about 15 percent of its total expenditures on ongoing subventions, while it has also been called on to support guaranteed debt of SOEs.

“At the same time, the increasing interest payments on debt, exacerbated by the pandemic and high interest rates, have weighed on expenditures.”