Sunday, March 2, 2014

The looming introduction of value added-tax (VAT) and investors’ perceptions of the tax in The Bahamas

VAT creating ‘a lot of uncertainty’ for investors

But Bahamas still viewed as less risky investment than most regional peers

By Guardian Business Editor

Arguing that the looming introduction of value added-tax (VAT) is generating a “lot of uncertainty”, a KPMG valuation expert suggested that this is one of the “major risk factors” that is determining investors’ perceptions of The Bahamas at the moment.

Shana Lee, associate director of valuation services for KPMG Advisory Caribbean Ltd., was addressing the Chartered Financial Analyst (CFA) Society luncheon at Luciano’s of Chicago restaurant yesterday, on the topic of adjusting for country risk in business valuations.

Asked by CFA Society President Andrew Strachan what he sees as the major risk factors affecting The Bahamas’ sovereign rating over the medium term, a factor which goes into determining the country risk premium that forms part of a business valuation, Lee said: “One would be the sovereign debt level and two, there’s a lot of uncertainty with the potential introduction of VAT. So if you are an investor coming in now VAT is definitely going to impact the returns you’ll see, so it’s something you have to factor in.”

However, Lee described the quantification of the potential impact of VAT as “really tricky”.

“Its hard to say, I think it’s just going to come down to investors seeing that there’s uncertainty at this point and trying to factor that in,” she said.

Notwithstanding this uncertainty, Lee said that there has been a slight “uptick” in demand for valuation services in The Bahamas of late.

“There is activity. You see activity potentially with family businesses that are looking at succession plans and need to know the value of their companies for that. There are companies that may be looking at transactions and are evaluating what the potential price they may be looking at is. Valuations come up in terms of financial reporting, if you have goodwill on your books you need to value and test that goodwill every year so that comes up that way. There is work, though the M&A (mergers and acquisitions) market is a little bit slow right now, so there’s certainly room for growth,” said Lee.

The valuation expert explained that generally speaking valuations look at potential political, economic and liquidity risks in a given country, as investors want to know what risks are involved across a range of areas in a country where an acquisition or investment may be set to take place, in order to get an appreciation for what types of returns they should expect should they invest.

However, she added that due to a lack of data availability in some countries – a factor in The Bahamas, she noted, due to the small size of the capital market – models have been created which use a country with good data as a benchmark and which then attempt to adjust for the incremental difference in the risk between that country and the country where the valuation is taking place.

This provides a “basic” but not fail-proof country risk premium which can be utilized by investors to determine whether or not they will pursue an investment, and at what cost.

In addition to this basic assessment, a more complex assessment of country risk is sometimes undertaken which takes into consideration other factors.

Out of nine countries listed in the Caribbean, The Bahamas was ranked roughly equally with Trinidad and Tobago in terms of its country risk premium for investors, behind the Cayman Islands and Bermuda, but ahead of Barbados, Dominican Republic, Suriname, Jamaica and Cuba.

The Bahamas country risk premium, based on the various models, tended to hover below five percent, while for countries such as Jamaica the risk premium is in the region of between eight and 18

percent, while Cuba’s risk premium went as high as 28 percent depending on which model was used.

The relatively high ranking of this country in the region points to how notwithstanding risk factors and the fear of uncertainty generated by VAT, The Bahamas is still view largely positively in comparison to its peers by investors and advisory firms.

In an interview with Guardian Business, Lee suggested it does appear that the government is taking some steps to ensure that its country risk premium remains lower – and therefore its attractiveness to investors, higher – than many of its regional peers.

“I guess the government is trying to take measures to address the sovereign debt level and hopefully the uncertainty relating to taxes would be resolved in coming months. So hopefully both of those things would be resolved. Similarly there are other factors that come into play like tourism and crime, so to the extent that the government is able to address those issues it would also help.”

Lee said that among the key factors determining The Bahamas’ country risk premium is perception.

“It comes down to country credit ratings, two of the three primary models to determine country risk are both based on credit ratings, and even the country risk rating model it’s based on investor perceptions of the riskiness of investing in The Bahamas, so it really comes down to investors and others’ perceptions of risk,” she said.

February 28, 2014