The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas’ upgraded ‘positive’ outlook from Moody’s “creates a sound platform... for deeper reforms” and a potential buffer against global economic turmoil, a financial analyst argued yesterday.

Hubert Edwards, principal of Next Level Solutions, told Tribune Business that given the potential for an improvement in the country’s creditworthiness within the next six to 12 months it needs to focus on enhancing competitiveness and reducing the subsidy drag caused by loss-making state-owned enterprises (SOEs) such as the Water & Sewerage Corporation.

Backing the Davis administration’s energy reform drive, and called for “more effective and efficient” public spending by the Government, he described The Bahamas’ debt - especially its high cost and affordability - as “a big soft spot” that needs to be addressed.

However, Mr Edwards also told this newspaper that planned reforms to the Bahamian dollar debt and bond market “bode well”, and said Moody’s ‘positive’ outlook for the credit rating “will be sticky in the near term” - meaning it is unlikely to change for at least a year, thus giving the economy and public finances some modest protection given the chaos caused by Donald Trump’s trade and tariff policies.

“It’s a positive development for the country. It comes at an important time of global upheaval and great uncertainty, and therefore augurs well for the ability to maintain some measure of stability should things get worse,” Mr Edwards said of Moody’s decision to raise its outlook on The Bahamas from ‘stable’ to ‘positive’.

“There is the usual style of the rating agency saying a lot without saying much in that it often does not explicitly detail what was told to it and how it came to the conclusion. That said, there are always a number of hints plus the historical credibility that they enjoy. Overall, the picture painted is generally positive. It assumes that the plans presented, as outlined in the report, will be effectively implemented.”

Picking out specific issues identified by Moody’s, Mr Edwards added: “Debt is a big soft spot... An area of concern is the ongoing weakness in affordability. This is highlighted in contrast to similarly-rated sovereigns. This, obviously, is where lots of work is required despite the positive downward trending of debt-to-GDP.

“The planned implementation of a local bond market is significant in rationalising maturities and maintaining low cost. It would appear that Moody’s is convinced that this process is well advanced. If that is the case it bodes well as it will create a balance in managing rollover risk associated with the debt portfolio in general, but especially counter-balancing the more difficult foreign currency portions.

“Rationalising maturities will be a fundamental step is easing the burden associated with managing the debt. The upgrade to a positive outlook is significant as it means that the rating we enjoy will be sticky for the near-term barring any catastrophic developments,” he continued.

“This development, I believe, creates a sound platform for exploration of deeper reforms designed to reduce expenditure by becoming more effective and efficient. One such area of focus should be in SOEs and, as indicated by the Prime Minister, continued efforts in reforming the energy sector.

“A careful read of the report and the Prime Minister’s comments thereon will lead to the conclusion that there are a number of areas where significant improvements in effecting reforms can be achieved. The outlook is premised on the success of maintaining improved revenue intake and effective management of cost.

“Therefore, robust and disciplined and strategic reforms, fiscal and economic management, will be the order of the day, especially in light of potential disruptive global headwinds.”  The Davis administration asserted that the ‘positive’ outlook from Moody’s is the first time The Bahamas has gained such status since Standard & Poor’s (S&P) gave a similar prognosis in 2007 just before the following year’s global recession.

While Moody’s move represents a positive development - particularly in the present climate of global economic chaos, volatility and uncertainty caused by US trade and tariff policies - the assessment that accompanied the improved outlook projected that the increased Budget surpluses and debt ratio reductions forecast by the Government will take longer to emerge than it is predicting.

For instance, while the Government is forecasting primary surpluses equal to 3.9 percent and 6.4 percent of Bahamian economic output in the 2024-2025 and 2025-2026 fiscal years, Moody’s is instead projecting that - while revenues will indeed exceed recurrent spending once debt interest payments are stripped out - these surpluses will be 3.2 percent and 4.5 percent of gross domestic product (GDP).

And, while the Davis administration is predicting that central government debt as a percentage of economic output (GDP) will decline to 76 percent at end-June 2025, and fall further to 60.4 percent at the close of the 2027-2028 fiscal year, Moody’s is forecasting a slower pace of fiscal consolidation. It only says that The Bahamas’ debt-to-GDP ratio will be “below 70 percent” come the end of fiscal year 2028.

The credit rating agency, while agreeing that continued fiscal improvements will ease this burden, also pointed out that the Government’s gross financing needs are equal to 20 percent or one-fifth of GDP this fiscal year. These needs, it added, will remain “elevated” with the Government needed to refinance or roll over one-third of its Bahamian dollar debt on an annual basis - increasing the risk investors may demand payout

Still, in a nod to present stock market and global financial turmoil, Moody’s said this is “unlikely” to cause a major negative fiscal impact for The Bahamas even if it lasts for some time. “The change in outlook to ‘positive’ reflects the increased likelihood that fiscal consolidation will strengthen The Bahamas’ credit profile over time,” Moody’s said of the rationale for yesterday’s outlook improvement.

“The Government has already implemented a substantial fiscal adjustment, and their commitment to maintain large primary surpluses thanks to revenue-enhancing reforms increases our confidence that debt will remain on a downward trend - below 70 percent of GDP by 2028 from 76 percent in 2024.

“In turn, lower borrowing requirements - driven by smaller net fiscal financing needs – would reduce government liquidity risk. The Bahamas’ positive fiscal and liquidity developments are unlikely to be significantly affected by a period of global financial markets volatility.”

Pointing to what it described as a “growing track record of fiscal consolidation”, Moody’s added: “The Bahamas has demonstrated meaningful fiscal consolidation over the past two years, with the primary balance shifting to a surplus of 2.9 percent of GDP in fiscal year 2024 from a deficit of 1.4 percent of GDP in fiscal 2022.

“This improvement reflects a reduction in pandemic-related spending, increased revenue associated with the recovery in tourism as well as improved tax compliance. We expect the Government’s commitment to fiscal consolidation to ensure government debt remains on a downward trend.

“We expect the primary surplus to increase to 4.5 percent of GDP in fiscal 2026, up from 3.2 percent of GDP in fiscal 2025, driven by higher revenue collection and discipline on the expenditure side,” Moody’s added.

“The improvement in the primary balance that we forecast incorporates continued efforts to enhance tax compliance and additional revenue from the introduction of a 15 percent Qualified Domestic Minimum Top-Up Tax (QDMTT) on large multinational corporations operating in The Bahamas. We expect approximately 1 percent of GDP in additional revenue from the QDMTT beginning in fiscal 2026.”