Tuesday, September 25, 2012
Tuesday, September 25, 2012
On Sept. 24, 2012, Standard & Poor’s Ratings Services revised the outlook on its long-term rating on The Commonwealth of The Bahamas to negative from stable. At the same time, we affirmed our ‘BBB/A-2’ sovereign credit ratings and ‘BBB+’ transfer and convertibility assessment on The Bahamas.
The outlook revision reflects our view that the government’s fiscal profile has continued to weaken. The government deficit, instead of peaking and starting to decline, rose even further in the fiscal year ended June 2012. Capital expenditure cost overruns (essentially on the New Providence roads project) and continued sluggish growth in recurrent revenue pushed the general government deficit to an estimated more than 7% of GDP. Standard & Poor’s considers US$86 million in capital revenue as “below-the-line” deficit financing, in contrast with the government’s budget documents. We expect a general government deficit of about 6.7% of GDP for the fiscal year ending June 2013. We don’t expect the overruns associated with capital projects to moderate until the following fiscal year (ending June 2014), when the deficit could fall toward 4.4% of GDP.
The May general election complicates efforts to lower the deficit more quickly–the new Progressive Liberal Party (PLP) administration took office toward the end of the fiscal year. The new government sees little room to make a larger near-term adjustment, beyond some expenditure and revenue efficiencies, and it wants to advance some of its own new programs. However, the administration has stated its commitment to reduce the deficit during its term in office. An important component appears to be a potential tax reform.
A long-standing constraint on The Bahamas’ fiscal flexibility has been a comparatively low and narrow revenue base, at about 20% of GDP. The Bahamas has no personal income tax or value-added tax. Instead, taxes on international trade and transactions account for more than 50% of revenue. Enhancing that revenue base has been politically challenging and more recently limited by the timing of the general election. A reform to broaden The Bahamas’ tax base would seemingly take several years to conceptualize, pass, and implement. In the interim, deficits are likely to remain at higher-than-anticipated levels, absent more significant expenditure adjustment or a boost to growth.
We project net general government debt to rise from 36% of GDP in 2011 to 41% of GDP in 2012 and 45%-47% in 2013-2014. The interest burden has risen in recent years, to about 13% of general government revenues in 2012. However, about 80% of debt is issued locally and held by residents, which somewhat mitigates the debt and interest burden. Capital controls limit the ability of commercial banks (which are very liquid), public corporations, and pension funds to invest outside The Bahamas. The government’s June bond issuance of Bahamian dollar (B$) 200 million, with tenors of five to 19 years at coupons of 4%-4.35%, was fully subscribed.
The Bahamas’ track record of political and macroeconomic stability that has delivered high per capita GDP, projected at almost $23,307 in 2012, supports our ratings. However, the country’s significant dependence on tourism and the U.S. market is a vulnerability of the Bahamian economy. Tourism accounts for more than 50% of The Bahamas’ GDP and employs more than 50% of the labor force, and U.S. tourists account for more than 80% of The Bahamas’ total tourists. We expect growth of 2.5% in 2012 and 2013, up from 1.6% in 2011, as construction associated with tourism investment projects supports growth amid a continued slow recovery in tourism.
The Bahamas’ external financing gap is high, and we expect it to average 145% in 2012-2014. (The external financing gap is current account payments plus short-term debt according to remaining maturity relative to current account receipts and usable reserves.) Standard & Poor’s believes that errors and omissions in the balance of payments most likely represent underreported foreign direct investment or tourism inflows and, thus, qualitatively diminish liquidity risks of the officially large external current account position. Importantly, the government’s external amortization needs are low.
The negative outlook reflects the increased likelihood of a downgrade if the new administration does not take action to reduce The Bahamas’ fiscal deficit and arrest the increase in debt to GDP over the next several years. A weakening in our current assessment of The Bahamas’ generally strong commitment to deliver sustainable public finances and economic growth could lead to a downgrade. Conversely, the ratings could stabilize at the current level if the government takes a more proactive policy response to reduce debt or if the Commonwealth’s economic prospects strengthen.