Standard & Poor's (S&P) latest assessment of the Bahamas' public finances: ...hinted strongly that it was not overwhelmed by the Government's fiscal plans and that the Ingraham administration could do more to set the national debt and deficit back on a more sustainable path

S&P: Bahamas needs 'proactive' debt policy


By NEIL HARTNELL
Tribune Business Editor
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A major Wall Street credit rating agency would raise the Bahamas' sovereign credit rating if the Government initiates "a more proactive policy response" to reduce this nation's national debt, noting the economy's "modest growth prospects" and likely "limited" improvement in the fiscal deficit prior to the upcoming general election.

Standard & Poor's (S&P), in its latest assessment of the Bahamas' public finances during a round-up of developments in Latin America, hinted strongly that it was not overwhelmed by the Government's fiscal plans and that the Ingraham administration could do more to set the national debt and deficit back on a more sustainable path.

The analysis, prepared by Bahamas country analyst Lisa Schineller, said S&P's 'stable' outlook on this nation's sovereign credit rating "reflects our expectation that the Government will gradually reduce its fiscal deficit and will maintain a generally stable external financing profile".

On the downside, she said the Bahamas 'BBB+' and 'A2' short and long-term ratings, respectively, " could come under pressure if the Bahamas' fiscal deterioration persists and the economic base erodes more severely".

Yet, more interestingly, Ms Schineller wrote: "Conversely, we could raise the ratings if the Government takes a more proactive policy response to reduce debt levels or if the Commonwealth's economic prospects strengthen."

For its 2011-2012 Budget, the Ingraham administration is projecting a GFS fiscal deficit of 3 per cent or $248 million. Debt principal repayments of $66 million are stripped out of this measurement, the total deficit forecast to be $314 million.

Direct government debt, as a percentage of gross domestic product (GDP), is projected to grow to 46.2 per cent at the end of the next fiscal year on June 30, 2012, and keep on rising to 47 per cent and 47.7 per cent at the end of fiscal 2012-2013 and 2013-2014 respectively.

In its latest analysis, S&P projected that general government deficits would decline to an average of 3.6 per cent of GDP over the period 2011-2013. Net general government debt, which stood at 33 per cent of GDP in 2010, was projected to continue rising to 38 per cent by 2012, gross debt having risen from 36 per cent in 2007 to 47 per cent last year.

"The Bahamas' fiscal deficit is projected to decline over the forecast period, but improvement might be limited ahead of the next general election that is due by May 2012, given the still subdued growth outlook," S&P said.

"Specifically, the Government increased capital and social spending to mitigate the impact of the recession on society despite a decline in tax revenues............ Importantly, the Government's external amortisation needs are low, as the share of external debt to locally issued debt is about 20 per cent."

The Wall Street credit rating agency is projecting a general government deficit of around 5.3 per cent for the 2010-2011 fiscal year that is due to end on June 30, down from the 6.6 per cent gap incurred in 2010.

"The Bahamian hotel industry has recovered somewhat but does not expect a meaningful revival of tourism in 2011, and still appears dependent on promotion deals," S&P added. "The Bahamas was significantly affected by the global recession, and like elsewhere in the Caribbean, has recovered very slowly.

"We expect the Bahamas' tourism sector to improve slowly in line with the US economic outlook (and US consumer). The economy's dependence on one product (tourism accounts for more than 50 per cent of GDP and employs more than 50 per cent of the labour force) and one market (US tourists account for more than 80 per cent of the total) is a vulnerability."

S&P included among the Bahamas' weaknesses the rise in the fiscal deficit and national debt, given the weak recovery, coupled with spending increases and reduced tax revenues.

It also noted the "high current account deficit and weak, albeit fairly stable, external liquidity".

June 16, 2011

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