A look at the unfolding economic recovery of The Bahamas, part 1
Based on reported information, The Bahamas economic recovery, performance and reconsolidation is trending well.
While largely explained by the post pandemic and global financial crisis recovery, the current administration is to be commended for so far marshalling an upbeat improvement.
The administration appears to be getting a number of things right especially in the tourism and investment portfolio led by the Deputy Prime minister Chester Cooper.
Announced initiatives should bring support from other sectors, especially agriculture.
However, some may be time bound and are likely to face challenges once global supply chains fully readjust.
The sense though that there is a clear growth mindset and strategic intent is critically important.
Tourism remains the goose laying the valuable eggs.
What is fundamental about its performance is the ability to positively impact market sentiments, drive connected economic clusters and given that it is the mainstay of the economy, influence investors’ outlook.
I continue to take the view that there are other important areas that need focus; however, the announced initiatives and the performance to date augurs well for meeting or even surpassing targeted outcomes for this fiscal year, as long as the reported trajectory holds true.
But we must necessarily navigate this thinking with positive caution. So as not to get over confident we must remain appreciative of the fact that there is still plenty to do.
The halfway mark
The midyear budget debate is now firmly behind us. The output has been generally positive.
For those who follow closely, you would be aware that it attracted a bit of drama regarding the reporting of the fiscal deficit.
The prime minister demonstrated sober leadership in subsequently clearing up misunderstandings.
He admitted he had misspoken based on incorrect information included in his speech.
This brief development is indicative of the importance of government getting it right, being on the right track and producing the right results.
The margins for errors are very small. Even the slightest whiff of the possibility of missing fiscal targets will attract urgent attention and robust discussion.
The current administration set into motion a set of policy decisions that it expects to terminate in a fiscal surplus within three years.
Based purely on the current reported performance, the newly emerging sentiments around debt and trajectory of performance in the tourism industry, the outcomes appear achievable.
With the country’s experience in the last three years and having within that time had cause to moderate future outlook, it is reasonable that developments at this stage will take on some sense of celebration.
It is also reasonable in my view that due regard should be given to those who have been working in managing this recovery and continue to so do. The upside news is generally positive.
On balance though, the upside observed does not represent the totality of the story.
Economically The Bahamas is at an interesting place.
The last five years have resulted in a fundamental shift in fiscal fortunes especially an accumulation of national debt which grew as high as 104 percent of GDP.
While not necessarily a popular sentiment, government is faced with a situation where the level of financial resiliency is much lower than is comfortable and the most critical need and policy outcome is an absolute reduction in the level of debt.
Outside of austere options the only means of achieving this is to grow the economy.
This is one reason the fiscal targets set by the government are so important.
In my view they represent an honest acceptance of the need for growth.
Having set them, they provide a window to understand how critically narrow the space for operating is and the gravity of the implications should we fail to get them right.
Support, especially of the private sector, for the targets is fundamental and the terms of engagement must become very clear, very fast (see Part II).
Government has little to no ability to grow the economy by itself.
Policy not just numbers
In his recent midyear budget presentation, Prime Minister Philip Davis said, “On several occasions in this House, I have observed that national budgets reflect the government’s priorities and choices.
“I do so because I want the Bahamian people to understand that the numbers in the budget are not just an accounting exercise, not a simple case of balancing the books.”
This very important statement is the prism through which all reasoned assessments should take place.
The fiscal targets detailed in the last budget and reiterated in the midyear debate represents the government’s decided policy path.
Accurate assessment should therefore focus on the whys and every pronouncement should be viewed against this inherent policy canvas.
A recent example is the pronouncement by Minister of Economic Affairs Michael Halkitis that any change in petrol dealers’ margins which result in an increase for the consumer is a non-starter.
Consider the minister’s response carefully. What could have been said is that the likelihood of any increase to the dealers that will result in an increase to the consumers will not happen if the government is being asked to reduce the taxes it currently takes on the sale of petrol.
I don’t think the government will rush to increase the margin because it cannot afford to reduce the taxes and if there is to be a change it will result in an increase for the consumer.
The government isn’t simply in the business of balancing numbers on paper but rather strategizing for and responding to realities.
Whether they choose to articulate it in such a manner, government cannot afford to take any loss to its revenue base and is in fact working actively to expand same. Take note recent tax related new items – Air BnB, family island proportional tax burden, accurate reporting for value-added tax (VAT).
The current fiscal space is razor thin.
Tax and revenue intake for the government is fundamental and the policy objectives come with restrictions on how the policy can be executed.
The prime minister noted “…we must be fiscally prudent and responsible, but we can also be compassionate and morally responsible.”
Fiscal prudence and responsibility at this time demand growth in revenue.
Compassion and moral responsibility demand protecting consumers and taxpayers from increases as best as is possible while creating opportunities.
Against the backdrop of positive performance and a recognition of the need to grow the economy there is also the always looming issue that the room for adjustments is limited, very limited.
Consequently, paying special attention to the unfolding economic developments of the country is essential and its management should not be treated abstractly.
The world is watching
An example is the recent report from Santander, published March 10, 2023. It carried the caption, “Bahamas – Strong Tourism”.
The bi-line then reads, “Revenues are robust but spending needs to slow”.
The report goes on to state in part, “The strong recovery in tourism remains the backbone for economic growth and fiscal consolidation…the departure tax through the first half of FY2022/23 is running at 74 percent of the budget….however the resurgence of high spending needs to decelerate in the second half of FY2022/23 to comply with the annual budget deficit and to remain on the trajectory to meet the fiscal surplus in FY 2024/25.”
Directionally the country is doing well on the revenue side but the overall financial state of affairs has not yet matured to a point where adjustments are easily made.
There are cautionary notes to be taken and this makes the argument for shunning abstract analyses and for taking seriously the prime minister’s statement.
The pronouncements are not simply a paper exercise or balancing a budget.
Having been set, they are now targets that create clear expectations in both the local and international markets; they are benchmarks against which performance will be judged and investments decisions taken.
I would recommend policymakers on all sides to take a careful study of the Santander report. In my view there are many positives to take away but also an indication of how the outside might be seeing the country.
This report carries general support for the government’s policy positions; clear recognition of the performance and depth of fiscal recovery; an honest assessment of the path to 2024/25; that The Bahamas is unlikely to relapse into a crisis and should be more resilient against a downturn in the US economy.
However, it cautions “the current pace of spending isn’t sustainable and there isn’t much flexibility against any shocks or budget seasonality” together with shifting its recommendation in investing in The Bahamas debt, on a risk reward basis, to neutral.
This latter point should demand careful study.
The lower yields are great for the country and hold implications for borrowing cost. Again, credit must go to the administration for the steps taken to achieve this.
However, we should not lose sight of the fact that it appears that their view of the country’s risk profile, on a risk/reward basis, renders the debt less attractive than we might have anticipated.
An appreciation of the implications of this will no doubt inform policy deliberations
Linking the forgoing discussion to the Fiscal Strategy Report (FSR) is critically important. Based on review there is great congruency between the budget (all projected years taken together) and the FSR.
Having regard to the prime minister’s admonishment, the numbers are indicative of hardening policy positions.
It is much easier to isolate performance in a budget presentation.
Therefore, taking into account the entirety of the FSR provides a basis for deeper understanding in assessing where we are and what it might take to maintain the current momentum, together with any implications of not achieving these planned goals.
This will be discussed in part two to this piece.
• Hubert Edwards is the principal of Next Level Solutions Limited (NLS), a management consultancy firm. He can be reached at firstname.lastname@example.org. Hubert specializes in governance, risk and compliance (GRC), accounting and finance. NLS provides services in the areas of enterprise risk management, internal audit and policy and procedures development, regulatory consulting, anti-money laundering, accounting and strategic planning. He also chairs the Organization for Responsible Governance’s (ORG) Economic Development Committee. This and other articles are available at www.nlsolutionsbahamas.com.