The Tribune

• Nation’s financing risks said to remain ‘elevated’
• Also voices scepticism over meeting deficit goal
• Minister: IMF admits we’ll beat their projections

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas still faces significant financing risks given that it is due to repay $900m in foreign currency loan principal over the next two years, a multilateral lender has warned.

The Inter-American Development Bank (IDB), in its latest Caribbean Quarterly Bulletin released yesterday, revealed that this sum excludes both external bond issues and debt servicing costs as it suggested the Government could still encounter “difficulties” of global financial market and fiscal conditions turn against it.

“Although the stock of debt has been decreasing, government financing needs are high,” the IDB said. “Despite the fact that no sovereign external bonds will mature from now until 2025, amortisation of external loans will exert most of the financing pressure, since within the next two fiscal years around $900m will need to be repaid in addition to interest payments.

“If fiscal and financial market conditions worsen in the medium-term, The Bahamas could face difficulties in reducing these large financing needs.” Michael Halkitis, minister of economic affairs, told yesterday’s media briefing at the Prime Minister’s Office that rising global interest rates had resulted in the Government incurring higher-than-expected debt servicing costs on its US dollar debt.

This, he added, was one factor that will likely push the projected fiscal deficit beyond its originally-forecast $131m target for the 2023-2024 full-year, taking it within a $146m-$216m range that is equivalent to 1-1.5 percent of gross domestic product (GDP).

Meanwhile, the IDB yesterday said that despite the Government’s access to a somewhat captive domestic investor base that has little choice but to invest in its Bahamian dollar debt, its financing costs will remain high in the short-term given the multi-billion dollar sums that have to be refinanced and rolled over on an annual basis.

“In an environment of high interest rates, rolling over debt and covering fiscal deficits is going to keep financing costs high for small island developing states like The Bahamas,” its report added. “As fiscal consolidation continued in 2023, The Bahamas’ consolidated public sector debt (net of intra-public sector holdings) reached 86.8 percent of GDP at year’s end, down from 91.5 percent at the end of 2022.

“However, the debt-to-GDP ratio is still significantly above the 66.1 percent in fiscal year 2018-2019, the year before Hurricane Dorian and the pandemic. In line with the medium-term debt management strategy, the currency composition of public debt continued shifting toward domestic currency instruments last year, as foreign currency debt accounted for 46.7 percent of the total, down from 46.9 percent in 2022.

“Most of it is held by the private capital market and international financial institutions. In a context of high liquidity in the domestic financial system, local currency debt accounted for the remaining 53.3 percent of total public debt and is well received by the domestic financial system.”

And, with impeccable timing given that the Government unveiled its 2024-2025 Budget just 48 hours ago, the IDB joined those voicing scepticism that it will meet even its revised deficit and other estimates for the current 2023-2024 year that closes at end-June.

“Fiscal consolidation seems to be losing track during fiscal year 2023-2024,” the Caribbean Quarterly Bulletin asserted. “The Budget that came into effect on July 1, 2023, contemplated an overall fiscal deficit of $131m, equivalent to 0.9 percent of GDP. The primary fiscal surplus was expected to increase from $39m to $486m (3.3 percent of GDP).

“However, preliminary estimates for the 12-month rolling-sum ending in March 2024 show that the overall deficit reached $542m. While the figure is just about the same as last fiscal year’s deficit, it is significantly below the $131m deficit forecast in the Budget, and even below the pre-pandemic average deficit of $389m.

“Although there are still three months left to close the fiscal year and tourist arrivals are still growing in double-digit numbers, it seems unlikely that the Government can reduce the overall deficit by $400m in just a quarter.”

It is unclear what the IDB is basing its numbers and forecast on, and the Government would likely vehemently dispute its conclusions. The Prime Minister, in Wednesday’s Budget communication, said the $214.1m deficit generated for the first nine months of the 2023-2024 fiscal year represents a 14.3 percent or $35.7m drop from the prior year comparative of $249.8m.

And he asserted that string revenue growth will bring the Government’s full-year deficit in within the forecast range, although no mention was made of the typical $200m-$300m worth of ‘red ink’ that is typically incurred during May and June as multiple government entities race to have bills the Ministry of Finance knew nothing about paid before year-end.

“I would like to highlight that, historically, March has typically been the highest revenue-generating month in a given fiscal year,” Mr Davis said.

“Consistent with that pattern, March 2024 was indeed a strong month, but it is the month following to which I draw your attention. The preliminary total revenue for April 2024 is estimated to be $385.8m, reflecting a significant increase of $108.6m, or 39.2 percent, compared to April in the previous year.

“The strong revenue performance in April shows that fourth quarter revenue performance will be very strong, which provides the basis of our favourable outlook for meeting our revenue targets to the end of the fiscal year.”

However, the IDB’s Caribbean Quarterly Bulletin also added its voice to those warning that the Government will struggle to hit its 25 percent revenue-to-GDP ratio target by 2025-2026 without implementing new and/or increased taxes.

“In a context in which the improvement in tax revenue administration by itself will not be sufficient to reach the goals set in the Fiscal Strategy Report 2022 without imposing other revenue measures, such as the introduction of the corporate income tax as early as in upcoming fiscal year 2024-2025, the IMF expects the overall deficit to reach 2.6 percent of GDP in 2023-2024 and 2.1 percent in 2024-2025,” the IDB said.

Mr Halkitis yesterday said IMF officials, when he met them last month for the Fund and World Bank’s Spring meetings, had conceded that The Bahamas would beat its 2.6 percent deficit forecast for the current fiscal year, representing around $379m.

However, the IDB report asserted: “Although fiscal consolidation continues, early figures for the first nine months of the current fiscal year suggest that it will be difficult to fully meet the target of a 1 percent of GDP deficit set in the Budget unless there are significant increases in revenues or important new expenditure measures. Financing needs remain elevated, and although lower, the debt-to-GDP ratio is still high.

“In such a fiscal context, the Government recognises that improving tax revenue administration alone will not be sufficient to reach the goals set in the Fiscal Strategy Report 2022, and that it will be necessary to introduce new taxes, such as the upcoming corporate income tax for foreign companies.

“Credit to the private sector has gained some dynamism, without an impact on international reserves. Medium-to-long-term growth prospects are favourable as Bahamian society shifts its energy matrix toward renewables, increases digitisation in the public and private sectors, and seeks to unleash the potential of its Blue Economy.”

The proposed corporate income tax for Bahamas-domiciled entities that are part of multinational groups generating over 750m euros per annum in annual turnover is forecast to generate $140m in revenue when implemented for a full year.

However, the Davis administration has repeatedly contradicted the IDB’s stance by stating that it has no plans for new and/or increased taxes and, indeed, the 2024-2025 Budget contains no such proposals. It is unclear how the IDB has formed the conclusion that the Government “recognises” that tax compliance and enforcement measures will be insufficient by themselves to meet its fiscal goals.