The Tribune

• Santander’s pre-Budget verdict: ‘It all depends on second half’
• Warns that first half improvement ‘not sufficient’ for $131m goal
• ‘Not much clarity’ on meeting ‘ambitious’ goal in data’s absence

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s “revenues will have to do most of the work” for it to hit an “ambitious” $131m full-year deficit target, with a major financial institution warning: “It all depends on the second half.”

Santander, in a May 24, 2024, pre-Budget update for institutional investors on The Bahamas’ fiscal status headlined “latent optimism”, said it was “interesting” that the Government’s presentation to international capital markets last month had reaffirmed its confidence this goal will be met despite the near-total absence of any current data.

No figures on the Government’s fiscal performance for the 2024 calendar year-to-date have been disclosed, and Santander said this meant “there was not much clarity” on how the deficit target - equal to 0.9 percent of Bahamian gross domestic product (GDP) - will be achieved given that the half-year’s $259m of ‘red ink’ was almost double the full-year goal.

And, while the April 2024 presentation to international investors by Michael Halkitis, minister of economic affairs, touted a 6.7 percent year-over-year increase in tax revenues for the current fiscal year’s first half, the bank said this “slight improvement... is not sufficient against the ambitious full-year target”.

Santander, which played a key role in advising on the Government’s recent $500m loan that was partially guaranteed by the Inter-American Development Bank (IDB), said: “There hasn’t yet been any fiscal data published for this year. However, it’s interesting that the latest investor presentation reaffirms the ambitious 2023-2024 fiscal target on reducing the 3.5 percent of GDP deficit to near balance.”

The immediate past fiscal year, 2022-2023, generated a $533m fiscal deficit, but Santander said of the present 2023-2024 fiscal period: “There is a little over one month remaining to close the fiscal year in June so authorities should have a preview for the full year. Perhaps there are logistical delays to develop a broader strategy ahead of the release of the 2024-2025 Budget next [this] week.

“There is room for optimism on stronger fiscal performance in the 2024 first half as well as plans for a new corporate income tax.” The latter, though, is likely to be imposed on just 50 companies that are part of multinational groups with annual turnovers exceeding 750m euros. And the run-up to this Budget has been clouded by uncertainty since no new fiscal data has been published for the period after year-end 2023.

“The latest investor presentation insists on the ambitious fiscal target for this year from 3.8 percent of GDP in 2022-2023 to a 0.9 percent of GDP deficit in fiscal year 2023-2024,” Santander said. “There was not much clarity on how to reach a full-year deficit target of $131m after the first half of the fiscal year was almost double the target at a deficit of $259m.

“The slight improvement on comparative performance in the 2023-2024 first half versus the 2022-2023 first half is not sufficient against the ambitious full-year targets. The effort all depends on the second half of the year. The revenues will have to do most of the work. The presentation insists on much higher revenues at 29.4 percent year-on-year in improved tax collection efforts to reach 23 percent of GDP in revenues for 2023-2024.”

However, the 29.4 percent mentioned by Santander refers to an anticipated jump in non-tax revenues as opposed to the Government’s main tax income streams and enhanced collections. Tribune Business previously reported at the time of the mid-year Budget that, while government revenues were up year-over-year for the 2023-2024 first half, they were behind the full-year growth targets.

While VAT revenues were up by 7.9 percent year-over-year for that period, this growth rate has to hit a much greater 27 percent or $339m over the $1.252bn collected in 2022-2023 to hit the full-year target of $1.591bn. And full-year total revenue and tax collections must also expand by a much faster 16 percent if the Government is to achieve its $3.319bn revenue target for the full year.

Still, Santander’s research note praised the Davis administration’s “proactive approach to reduce tax evasion; by fully equipping and resourcing the Revenue Enhancement Unit.

It added that the focus on delinquent real property taxpayers, and mandating mortgage lenders ensure borrower clients live up to their obligations, “should allow for a surge in property taxes closer to the target of 1 percent of GDP [$192m]”. The sell-off of commercial and foreign-owned vacant land, whose owners have not met their tax responsibilities for years, will also help drive property tax revenues.

“The VAT tax collection could also accelerate for maybe another 1 percent of GDP in additional revenues so that overall revenues are closer to target,” Santander added. “This would represent an obvious target on lower tax evasion from the Revenue Enhancement Unit and perhaps explains the optimistic VAT revenue projections within the 2023-2024 Budget.

“These revenue sectors could allow for potential revenues that could push the fiscal deficit at 3.8 percent of GDP [in 2022-2023] closer to the 0.9 percent of GDP deficit target this fiscal year.... The success on reducing tax evasion will then set the stage for how ambitious they’ll need to be on tax reform for the fiscal year 2024-2025 Budget.”

This, Santander suggested, could involve broadening corporate income tax to all domestic Bahamian companies although Mr Halkitis last week ruled this out - at least in the short-term. “The target for a structural increase in revenues from 21 percent of GDP to 25 percent of GDP is the backbone of the fiscal consolidation process on reversing a fiscal deficit of 3.8 percent of GDP in 2022-2023 to surplus of 1.8 percent of GDP in 2025-2026,” it added.

“The release of the fiscal data for 2024 may then coincide with a broader reassessment on how best to remain on track for this multi-year adjustment process....There hasn’t yet been a confirmation of a stronger fiscal consolidation. However, expectations remain optimistic from investor communications and feedback from the IMF and rating agencies.

Santander said Moody’s recent prediction that the Government will only narrowly overshoot its 2023-2024 deficit target by $44m, coming in at 1.2 percent instead of 0.9 percent, “is a serious vote of confidence... and a potential positive shock if the fiscal deficit targets come back on track”.

It added that for 2024 to-date The Bahamas has been “a notable outperformer” on one of Bloomberg’s emerging market indices, generating a near 8 percent return through to last week. Should Moody’s forecast be realised, Santander said it could produce “a further narrowing of yields below 9 percent” on The Bahamas’ existing foreign currency debt, further improving prices and borrowing costs.

It is unclear why no fiscal data has been forthcoming beyond the 2023-2024 fiscal year’s first six months, although observers suggested there are two potential explanations - the Government’s financial performance has fallen well short of target and expectations, or the Davis administration has met/exceeded them and plans to surprise everyone with a grand reveal during today’s Budget.

The Budget was last night branded as ‘Changing the Status Quo: Changing Lives’. Observers suggested that today’s presentation by the Prime Minister will likely reveal more details about the Government’s plans for energy sector reform and Bahamas Power & Light (BPL), with the possible reduction of electricity costs diverting attention away from any fiscal slippage.

Several sources have already suggested that the two electricity generation engines that arrived on New Providence this week may not be BPL’s but, rather, belong to the Shell North America/FOCOL Holdings group thought to have been lined up to take over management of BPL’s generation. The group is understood to be aiming to start generating power by July 29.

Other contacts said that, should the Government be on track to miss its deficit target by a wide margin, it will likely today bring an appropriations Bill to Parliament to authorise the borrowing of additional monies to cover the expanded gap measuring by how much spending will exceed revenue. They added that the greatest challenge could be securing the extra funding at affordable rates.

And, if the Government misses its deficit target by a margin greater than 0.5 percent of GDP, which is presently around $70m-$75m, it is required under the fiscal responsibility component of the Public Finance Management Act to bring a corrective plan of action to Parliament.