Sovereign credit rating agency Moody’s yesterday said it does not expect the outcome of last week’s general election, which ushered in a new Progressive Liberal Party (PLP)-led government, to cause any material shift in fiscal consolidation.
The agency, which, a day after the September 16 general election, downgraded The Bahamas to Ba3 negative from Ba2, however, forecasted an eight percent growth in gross domestic product (GDP) this year, with continued growth by seven percent in 2022.
Pointing to the nation’s debt burden rising to as high as 87 percent of GDP, Moody’s said it expects the PLP-led government to continue to prioritize fiscal consolidation and reducing the government’s debt burden over time.
“Over the remainder of fiscal 2022 and in fiscal 2023, we expect fiscal consolidation, driven mainly by the normalization of economic activity (and particularly tourist activity), which will increase revenue, and the removal of pandemic-related spending,” Moody’s said in its weekly credit outlook report.
“The pace of the economic recovery will directly affect the pace of fiscal consolidation and how quickly debt begins to decline. The reliance on indirect taxation – taxes on goods and services made up 67 percent of total revenue in fiscal 2019, the last pre-pandemic fiscal year – makes government tax collection more sensitive to the economic recovery than a tax system that relies more heavily on direct taxation.
“Combined with the high reliance on tourism as a share of GDP and employment, The Bahamas is more vulnerable than other tourism-reliant sovereigns to the pace of tourism recovery. The economic contraction in 2020 and relatively slow recovery will leave The Bahamas with a significantly higher debt burden compared with its pre-pandemic debt levels and significantly weaker fiscal strength than similarly-rated peers. We think it very unlikely that the government will be able to reverse the rise in debt over the past two years, although the debt burden likely peaked in fiscal 2021 and will gradually decline beginning in fiscal 2022.”
The Hubert Minnis-led Free National Movement left government with the highest debt in the country’s history, over $10 billion, and a fiscal deficit of $1.3 billion, after three consecutive years of borrowing to meet its obligations, particularly in the aftermath of 2019’s devastating Hurricane Dorian event, and the economic crisis from the COVID-19 pandemic that began in 2020.
However, the Minnis administration laid the foundation for a new fiscal management framework by passing the Fiscal Responsibility Act (FRA).
“We expect fiscal policy to be anchored by reforms enacted in recent years to improve the government’s institutional and fiscal policy framework,” Moody’s said.
“These measures include a set of fiscal rules, improved fiscal data dissemination standards, new procurement guidelines and new debt management legislation.
“The Fiscal Responsibility Act (FRA) included an original fiscal consolidation program that set a fiscal deficit limit of 0.5 percent of GDP as of fiscal 2021 (which ended 30 June 2021), in addition to capping the growth of current expenditure to the long-term rate of nominal GDP growth.
“The FRA sets a long-term objective to reduce the debt/GDP ratio to no more than 50 percent. The fiscal deficit widened to 12.3 percent of GDP in fiscal 2021, bringing the debt burden up to 87 percent of GDP. While Hurricane Dorian and the coronavirus pandemic have delayed achieving these fiscal targets, we expect the government to remain committed to achieving them over the medium term. Even if the targets are ultimately not achieved, they will serve to anchor fiscal policy.”
Moody’s said its baseline expectation assumes tourist arrivals – stopover arrivals – remain close to 75 percent of 2019 levels for the remainder of this year, leaving 2021 tourist arrivals at around 50 percent of 2019 levels.
“Assuming continued recovery in 2022, driven mainly by increased vaccinations and greater comfort with international travel, we expect The Bahamas to have another year of very high economic growth rates,” it said.
“We expect GDP growth of 8.0 percent in 2021 and 7.0 percent in 2022, after the 14.5 percent contraction in 2020. We expect stopover arrivals to return to 2019 levels by 2024, while cruise visitors will take longer to recover.”
Earlier this week, Minister of Economic Affairs Michael Halkitis said the first order of business of his new ministry will be to stabilize revenue as well as to develop a debt management strategy and possibly an interim budget in the coming weeks.