The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s projected $131m deficit for the current fiscal year is “already out the window” given the performance for the first four months, a financial analyst asserted yesterday.

Hubert Edwards, principal of Next Level Solutions, told Tribune Business that sophisticated investors and the likes of the credit rating agencies will have already “baked into expectations” that The Bahamas’ fiscal deficit will likely come in higher than the equivalent of 0.9 percent of gross domestic product (GDP) set in the Budget forecast.

However, he added that the key question is how much higher the deficit will ultimately be compared to the original $131m forecast. If the amount of ‘red ink’ for the full year comes in below the prior year’s $533m, Mr Edwards said The Bahamas can still retain investor and market confidence because the deficit will still be on a downward path.

Speaking after the Ministry of Finance’s October fiscal report revealed that the near-$120m deficit for the first four months of 2023-2024 is equivalent to 91 percent of the full-year target, Mr Edwards said it should come as no surprise to informed observers that this goal may be overshot given the much higher predictions by the International Monetary Fund (IMF) and Standard & Poor’s (S&P).

“If you look at that strictly on the basis of comparing it to what the Government has projected then certainly it may cause one to have some concern,” he added of the October deficit number. “But I think for those persons paying attention to developments, starting with the pronouncements of the IMF, that type of outcome is baked into expectations.:

The IMF, in unveiling its statement on the annual Article IV consultation with The Bahamas in late November 2023, 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 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.

Mr Edwards said that while the IMF has yet to fully explain how it arrived at this forecast, “it’s clear from the information filtering out that there’s a lot of volatility baked into the IMFs statement”. As a result, he added: “We should not expect to see numbers that are going to maintain any semblance of consistency with the 0.9 percent of GDP projection.

“That, for persons paying attention, that’s already out the window. The question, based on what we’re fielding, is how deeply is it [the final deficit] going to be removed from that projection. I’ve said before that the 0.9 percent was too aggressive and did not need to be set at that level.”

Mr Edwards, though, said the key is “what’s happening now and what are the revised projections looking like” as the Ministry of Finance runs its economic models to determine where the 2023-2024 deficit will likely end up.

“That’s the question that we need to be focused on and what the answer is,” he reiterated, adding that the Government will still retain its fiscal credibility with investors and the markets if it can bring the deficit in lower than the prior year’s $533m.

This would maintain the downward trend seen since COVID, and still keep The Bahamas on track to eliminate the fiscal deficit and generate a balanced Budget - albeit at a slower pace than forecast. However, were the deficit to exceed last year’s outturn, it would “undermine all the projections the Government has indicated up to now”.

Mr Edwards, though, said he personally did not believe The Bahamas needs to generate a consistent annual surplus and, instead, suggested a balanced Budget or minimal deficit would suffice. “The question is how best to manage our resources to minimise the deficit and make good on our obligations to creditors. That’s where we need to focus on to keep the credit markets as comfortable as possible,” he added.

Meanwhile, Kwasi Thompson, the Opposition’s finance spokesman, called for the Government to provide greater “transparency and clarity” on the interest rate and other terms involving in the Government’s $500m loan that was partially guaranteed by the Inter-American Development Bank (IDB).

“The Ministry of Finance’s statement on the matter, however, fails any reasonable measure of transparency and clarity,” the east Grand Bahama MP said in a statement. “The Government only has budgetary approval from Parliament to take on $131m in net new borrowing.

“So what is the planned use of the $500m loan? Is the majority of it - some $369m - just to be used to roll over existing debts? The Government must provide specific details on the use and drawdown schedule of this loan facility.

“If this loan is going to be used principally to pay off an old loan with a new loan, how is that consistent with the claim in the ministry’s statement that the proceeds “will fund eligible budgetary expenses such as infrastructure, education and social welfare projects”,” Mr Thompson added.

“The Government presently has authority only to borrow up to $131m in new funding for any budgetary expenses. So clearly the majority of the proceeds cannot be used for approved budgetary projects. The government must provide clarity on the matter. Why would the Government not provide the interest terms and fees related to this facility in their statement? How are we to evaluate any savings without it.”

The Ministry of Finance, in a statement, said the IDB’s policy-based guarantee “will initially cover up to 40 percent” of the scheduled principal ($200m) and interest that Bahamian taxpayers will have to repay to lenders.

And, by exploiting the IDB’s top-notch ‘AAA’ credit rating with a stable outlook, The Bahamas has been able to secure “considerably more advantageous” interest rates on the ten-year loan than it would otherwise have been able to get on the private international bond markets.

No details were provided on the interest rate(s) secured, or the potential cost savings, that will result from the partially guaranteed loan that was arranged by Banco Santander’s New York branch in the role of global coordinator and mandated lead arranger.

Mr Thompson added: “Finally, the Government’s statement notes that this is a ‘policy-based guarantee’ by the IDB. As the term implies, a policy-based facility from any of the multilateral financial entities would require the Bahamian government to commit to one or more policy measures.

“The Government must provide the full details of any policy commitments and conditions it has agreed to with the IDB as part of this arrangement. This information ought to have been forthcoming to accompany the Government’s announcement of the loan.”