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BEHIND THE HEADLINES: A tale of two countries

Tony Best

BEHIND THE HEADLINES: A tale of two countries

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Searching for proof that misery loves company?
Well, look no further than Barbados and Bahamas. For as the debate rages in Barbados about the country’s troubles forcing it to travel in the direction of the International Monetary Fund, Bahamas seems to be following some of the same signposts afflicting its CARICOM neighbours.
And symptoms run from the fallout from the global economic recession, high debt and ballooning deficit to persistent revenue weaknesses.
So, although Bahamas is in a much stronger fiscal position than Barbados and maintains the Caribbean’s highest credit ratings, Standard & Poor’s, which had previously downgraded the once stellar ratings of both Barbados and The Bahamas, put the latter on notice that it may be on the same trajectory as the former. It did that by “affirming” a “negative” outlook on the rating which,  thankfully, it has kept in place at “BBB.”
“The outlook on our rating is negative,” S&P warned The Bahamas a few days ago.
“We could lower our rating on The Bahamas one or two notches if the (Perry Christie) Administration does not take additional action to reduce The Bahamas’ fiscal deficit and arrest the increase in debt to GDP over the next several years. Passage and successful implementation of a revenue-positive [Value Added Tax] could be such a step.”
In a real sense, The Bahamas just dodged a rating bullet. A downgrade, should it occur later, would place the rating close to Barbados’. The Bahamas rating was downgraded from A- to BBB+ in December 2009.
In July last year, S&P downgraded Barbados’ rating from BBB-/A3 to BB+/B with a “stable outlook,” warning that the “downgrade reflects our opinion that Barbados’ economic fundamentals continue to weaken”.
“We believe this weakening stems, in part, from rising competitiveness challenges and other structural factors that the government can address only in the long term.”
The credit rating firm explained that Bahamas, like Barbados, is a small open economy that is vulnerable to “adverse external developments”, a problem that was compounded by “sluggish” economic growth which it traced to “high economic concentration and dependence on tourism, finance and the United States economy, all of which have underperformed since the global recession”.
The upshot, S&P indicated, was a worsening Government fiscal picture.
“Higher debt and deficits on the outset of the recession have taken on a more structural element, given persistent revenue weakness,” it noted.
“A long-standing constraint on The Bahamas’ flexibility has been a comparatively low and narrow revenue base at about 20 per cent of GDP [gross domestic product].”
What makes life difficult for Bahamas, an archipelago of 700 islands and 2 400 cays, is that quite unlike Barbados, it doesn’t have income tax or VAT. It depends on taxes on international trade and transactions that bring in half of its revenue. Add domestic political battles to the equation and it would become clear why successive Bahamian governments haven’t taken the necessary steps to broaden the tax base, something S&P feels is necessary.
When the government changed hands last year with the Progressive Liberal Party led by Perry Christie assuming office, it sought to tackle the deficit problem by reducing expenditure, so much so that it was able to hold spending “constant in nominal terms with a decline in real terms during its first year in office,” S&P noted.
But that wasn’t enough. Low economic growth “underpinned a decline in revenue in nominal terms”, a malady that triggered a widening of the deficit to more than six per cent of GDP for the financial year ending in June. The problems didn’t end there. Net government debt rose to 40 per cent of GDP in 2012. Little wonder, then, that the government moved to boost revenue by increasing taxes, strengthening customs and improving property tax administration.
“We expect the deficit to decline to a still high 5.4 per cent of GDP in fiscal 2013-14 and we expect the debt to increase further,” warned S&P.
On the cards is an overhaul of the Bahamian government revenue base and efforts to arrest the debt. The country plans to follow Barbados and introduce VAT in July next year, but not before it has a series of public consultations and the enactment of VAT legislation by the end of next month or early next year.
Although the private sector there isn’t sure it is ready for VAT, S&P sees it as the right course.
“In our view, passage of a VAT reform that yields important new revenue, coupled with expenditure constraint, could stem the rise in the government debt trajectory and improve The Bahamas fiscal indicators,” the Wall Street firm said.
Interestingly, Bahamas doesn’t have the mountain of debt that is weighing down Barbados. S&P projects general government debt in The Bahamas to rise to 48 per cent of GDP by next year.
Something The Bahamas has going for it is that 75 per cent of its debt was issued locally and is held by residents of the country, which “somewhat mitigates the debt and interest burden, and capital controls dampen the ability of commercial banks there to invest outside of the country.”
In its analysis of the country, S&P outlined a scenario that can work in The Bahamas’ favour or make life more difficult.
“We could lower the [credit] rating if, contrary to expectations, external financing conditions worsen for the Bahamian financial sector,” it insisted.
“Conversely, we could revise the rating outlook to stable with effective tax reforms or if the island’s new tourism offering produces greater economic growth with more positive fiscal and external spill-overs than we currently expect.”