Moody’s cautious about Bahamas’ economic prospects
NEW YORK – The US-based rating agency, Moody’s says the Bahamas government fiscal consolidation projections face multiple “risks” due to the absence of any tax increases in the multi-million dollar national budget that was unveiled in the Parliament on Wednesday.
Prime Minister Phillip Davis presented a multi-billion dollar tax free budget to Parliament as the country begins to rebound from the impact of the coronavirus (COVID-19) pandemic and now having to grapple with “great challenges and opportunities,” occasioned by a changing global environment.
Davis told legislators that ‘this is a time of great challenge for our country, but also a time of great opportunity.
According to Davis, the budget projects a significant “rebound in the Bahamian economy” and that total revenue is projected US2, 804.4 million, representing a 19.9 per cent increase over the last fiscal year “when the economy was in the early stages of an economic rebound of the COVID-19 pandemic
He said regarding expenditure, his administration intends to spend US$3, 368.4 million with recurrent expenditure projected at US$2, 997.2 million and capital expenditure estimated at US$371.1 million.
He said as a result of these operations, which incorporates total fiscal management principles, the fiscal deficit under the current budget is estimated at US$564.3 million.
Moody’s said that while the narrowing fiscal deficit was declared to be a “credit” positive for The Bahamas, it noted “over-optimistic revenue projections” in the absence of a wider tax base and difficulties in controlling government spending “in line with targets”.
It warned that this represent real threats to bringing the US$10.5 billion national debt under control, suggesting that the government which came to power in September last year, may have under-estimated its debt servicing (interest) costs due to a combination of rising global rates as developed countries move to fight inflation and “the increase in risk premium” for The Bahamas’ sovereign debt.
Moody’s said that the government’s plans to restrict recurrent spending over the next three fiscal years, with slight reductions planned for 2023-2024 and 2024-2025 compared to the upcoming 12 months, could constrain the economic growth it is relying on to improve the country’s post COVID-19 period.
“Key risks to the budget are overly optimistic revenue collection projections in the absence of concrete measures to broaden the tax base, and the inability to manage spending in line with targets,” Moody’s analysts said in a credit note to investors.
“Specifically, the government expects to keep primary recurrent spending unchanged over the next two fiscal years, which would reduce real spending given 15 percent nominal growth over the same period. Also, the Government’s assumptions for interest expenditure imply a decline in the average cost of debt despite a rising global interest rate environment.”
The budget was delivered under the theme “The Way Forward: A Plan for Recovery and Progress” and Prime Minister Davis told legislators that it provides a foundation to strengthen our nation, to lift ourselves up, to face the future with strength and optimism.
“This budget provides support for the here and now and also charts the way forward for a brighter tomorrow,” he added.
Moody’s noted that without an increase in taxes, the government projects that recurrent revenue will reach 24 per cent of gross domestic product by fiscal year-end 2025, 4.4 percentage points higher than fiscal 2022, and 5.4 percentage points more than in fiscal 2019.
“As we have noted previously, the government’s revenue assumptions may prove overly optimistic, leading to a more gradual fiscal adjustment.”
Moody’s said the government is also estimating that its debt servicing costs will peak at US$589 million in 2022-2023, before declining in following years.
“The budget projections suggest interest payments will peak in fiscal 2023 at 21 percent of revenue,” it said, adding “considering that financing needs and liquidity risk will be elevated over the next two years, with gross financing needs averaging more than 20 per cent of GDP in fiscal 2023-2024, an increase in borrowing costs would increase interest expenditures and result in a larger fiscal deficit.
“Given the rise in interest rates globally, and the increase in risk premium for the Government of The Bahamas’ debt, even assuming an unchanged average cost of debt would imply higher interest expenditure than the Government projects,” Moody’s added. (CMC)