GOVT DEBT TO WORSEN
By CANDIA DAMES ~ Guardian News Editor ~ candia@nasguard.com:
A rising government deficit and persistent revenue vulnerability will continue to drive government debt up in the near future, according to international credit rating agency Standard & Poor's, which says in a report that government debt as a percentage of gross domestic product (GDP) will climb to more than 50 percent by next year.
The report fleshes out the details of the agency's initial assessment of the Bahamian economy and the fiscal and monetary conditions revealed late in 2009.
While the expanded report points to increasing debt levels — as did the initial assessment — all the news is not so gloomy.
As it regards unemployment, the agency projects that joblessness will drop from 14.5 percent this year to 12 percent next year. A further decline to 10 percent is projected in 2012.
But S&P said foreign direct investments will slow further this year, and it repeated previous projections that the economy will likely decline by 0.5 percent in 2010 and grow in 2011 for the first time in three years. The growth next year is expected to be 2 percent.
While debt levels are projected to remain pressured in the immediate future, the agency made the point that current government debt levels temporarily provide some space for fiscal weakening compared to similarly rated countries. Compared to many of its peers, The Bahamas' debt levels are in a favorable position, the report noted.
"We project debt levels to rise, but domestic markets will provide most of the financing," said S&P.
The agency projects that general government debt — which stood at 32.8 percent in 2006 — will climb to 49.5 percent this year, move up to 51.9 percent next year and increase further to 52.4 percent in 2012.
Minister of State for Finance Zhivargo Laing noted last night that the new report provides a more comprehensive story on what had been published by Standard & Poor's late last year.
Regarding the debt projections, Laing said the government will be able to comment more fully on what its views are on where the country will likely be when the budget communication is presented next month.
Asked whether there is cause for concern as it regards debt levels, he said, "Any sound fiscal management program rests on wanting to control debt to the extent possible. In fact, nobody would borrow if they didn't have to, but where it is necessary it has been a part of the government's fiscal program for some time.
"In an extraordinary economic climate there's some extraordinary borrowing. We now have weathered the worst of it so we're now seeking to return to levels of borrowing and deficit spending that are more in keeping with what has been our objective in times past. So to the extent that we have no difficulty servicing our debt there is no concern. To the extent that we want to ensure that we don't continue to grow the debt to a place where that could be a problem one is always concerned to do that."
According to the report, the general government deficit rose sharply and likely will average 4.7 percent of GDP in fiscal year 2009/2010 and 2010/2011. General government deficits averaged 1.4 percent of GDP from 2000 to 2007.
The report explained that increased spending against a narrow revenue base, which has declined amid the economic recession, led to larger deficits.
S&P said the higher deficits reflect government policy to alleviate the social impact of the economic recession and to support growth. The report points to the government's unemployment benefit program, the temporary jobs program and accelerated capital works projects.
The agency said, "Deficit financing comes predominantly from domestic sources, a credit strength for The Bahamas. The structure of the debt remains favorable, though it has recently relied more on foreign debt. Domestic debt accounted for 90 percent of total debt in 2007, which declined slightly to 88 percent in 2008 and further to 80 percent in 2009."
S&P pointed out that the government had hoped to receive between US$200 million and US$300 million in proceeds from the sale of a 51 percent stake in the Bahamas Telecommunications Company in the first half of 2010 to alleviate financing needs.
"However, the government has once again postponed the privatization following seemingly disappointment with the bids and prices offered at the end of 2009," the report said.
The ratings agency said it expects foreign direct investments (FDI) to remain low in 2010.
"FDI totaled US$600 million during the first nine months of 2009, compared with US$1 billion in full-year 2008," S&P said. "We expect FDI to slow further in 2010 as tourism projects progress slowly."
The report said FDI projects that appear to have staying power are those that eventually will serve high-end customers or a niche group of tourists, as well as those that will provide residential tourism products.
The agency said, "Once buoyant prospects for a major expansion of tourism projects, totaling more than US$10 billion over the next five to 10 years, are more subdued."
In the report S&P repeats a controversial statement it made in a previous report.
It said, "After posting real GDP growth of 5.7 percent in 2005, momentum slowed sharply and then the economy contracted. In 2007, the increase in real GDP was a mere 0.7 percent as growth was interrupted, first by the elections and then by the new administration's protracted period of reviewing contracts after it came into office in May 2007.
"The review of $80 million worth of contracts and the eventual cancellation of a $23 million public contract for the straw market negatively affected investor sentiment and brought substantial disruption to the contracts' activity."
It noted that the straw market project did not move back on track until December 2009, when the government signed a construction contract.
As noted in its summary release at the end of 2009, the agency placed The Bahamas' sovereign credit rating at BBB+/Stable/A-2. This compares to the A-/Negative/A-2 rating it gave in November 2008.
Regarding the December 2009 rating, S&P said, "The stable outlook reflects Standard & Poor's expectation that the government will gradually reduce its fiscal deficit and will maintain a generally stable external financing profile. We do not expect The Bahamas' tourism product to improve sharply until the U.S. economic (and U.S. consumer) recovery has consolidated."
April 30, 2010
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