Bahamas Must ‘Buffer’ Against Deficit Blow-Out – Bahamas Tribune

By NATARIO McKENZIE

Tribune Business Reporter

nmckenzie@tribunemedia.net

Moodys forecast that the Government will incur another $300 million-plus fiscal deficit this year emphasises why the Bahamas needs to create a contingency fund to cope with natural disasters, the Chamber of Commerces chairman said yesterday.

Gowon Bowe told Tribune Business that this nation needed to set aside reserves or insurance premiums as a safeguard against the financial impact from Hurricane Matthew-type events.

When we look at things like hurricanes and the unexpected occurring, what that highlights is not only the need to plan for the normal environment, but also to plan for the rainy day environment. That adds a dimension that we now have to factor in, said Mr Bowe.

Moodys on Wednesday forecast that the Bahamas fiscal deficit will remain above $300 million for the current Budget period, with Hurricane Matthew blowing it slightly higher than the prior year.

The international credit rating agency, in its latest quarterly assessment of the Bahamas sovereign creditworthiness, gave an insight into the extent of Matthews impact on the Governments finances by projecting a deficit equivalent to 3.6 per cent of GDP for 2016-2017.

We estimate that the fiscal balance in fiscal year 2017 will deteriorate to -3.6 per cent of GDP from -2.8 per cent the previous year, due to the negative impact from the damages caused by Hurricane Matthew last October, Moodys said.

As the Government will incur additional borrowing to cover reconstruction spending for public infrastructure, we now expect the central government debt-to-GDP ratio to reach 70 per cent by end of fiscal year 2017, Moodys said.

When we look at the economy, the deficits and the debt, there are going to be unexpected increases due to unexpected events, Mr Bowe said.

However, we have to get to the point where just like any business we are managing not only for expected occurrences but contingencies, meaning we are setting aside reserves, or insurance premiums and the like, to cover the unexpected events. It allows you to buffer against the impact of major events. As a country we have to be thinking along those lines.

The Christie administration, in the aftermath of Hurricane Matthew, revealed that the Bahamas would not have received any relief from the Caribbean Catastrophe Risk Insurance Facility (CCRIF) because the storm was not strong enough to trigger a payout.

As a result, the Government had ceased making financial contributions because the Bahamas would only have received compensation in the event of a Category 5 hurricane.

While Moodys estimates were not surprising, its projections for the 2016-2017 fiscal deficit are more than triple what the Government forecast last May, prior to the unanticipated $600-$700 million in damage inflicted by Matthews Category Three-Four storm surge and winds.

The Christie administration had projected a $100 million GFS fiscal deficit for 2016-2017, equivalent to around 1.1 per cent of GDP.

However, Moodys estimate is slightly higher than the 3.5 per cent GFS deficit that the International Monetary Fund (IMF) estimates the Bahamas incurred in the fiscal year that ended on June 30, 2016.

Taking $8 billion as the size of Bahamian GDP, the rating agencys estimate suggests that the Governments GFS deficit for the current fiscal year will come in around $290-$300 million.

Moodys, though, given that it pegged the $2.25 billion in outstanding consumer credit as equivalent to 25.5 per cent of Bahamian economic output in 2016, is suggesting that this nation has a $9 billion GDP.

Applying the 3.6 percentage to this figure would place the estimated 2016-2017 fiscal deficit at around $324 million, highlighting just how badly natural disasters can blow a nations finances off course.

The Government sought to borrow $150 million in emergency credit immediately following Matthew, a target it largely met. However, this increased both the GFS deficit and national debt beyond projection, with Moodys revised estimate for the latter now placing it at the ratio considered by the IMF as a danger threshold.

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Bahamas Must 'Buffer' Against Deficit Blow-Out - Bahamas Tribune