Moody’S Gives Alarm On ‘Much Weaker’ Bahamas – Bahamas Tribune

ByNEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Moodys yesterday expressed alarm at the significantly worse fiscal deteriorationunveiled by the Governments 2017-2018 Budget, although its lead analyst indicated no junk downgrade for the Bahamas is imminent.

The credit rating agency, clearly taken aback by the Minnis administrations much-revisedfiscal forecasts, warned the global markets that its planned $722 million borrowing showed this nations fiscal strength was much weaker than it had bargained for.

Forced by surprise to adjust its own fiscal forecasts, Moodys wrote-off its previous projection that the Bahamas direct government debt-to-GDP ratio would stabilise below 70 per cent, instead estimatingthat this will continue to climb through the 2019-2020 fiscal year - in contrast with the Governments forecast that it will peak near 73 per cent in 2017-2018

Warning that the Bahamas debt-to-GDP ratio was the highest for any country it had rated one notch above so-called junk status, Moodys said this nation was seeking to achieve fiscal consolidation from a more negative starting-off point - especially given its vulnerability to major hurricanes in the absence of funding reserves to cover damages.

The Budget indicates that the Bahamas fiscal outlook is significantly worse than what we had incorporated into our current projections, the credit rating agency said. Revised government estimates point to a higher deficit for fiscal 2017, and deficits (rather than surpluses) in the coming years.

Wider, serial deficits will lead to rising debt and delayed debt stabilisation. Whereas we previously had expected that debt would stabilise this year, we now forecast that debt-to-GDP will rise until 2019, peaking above 70per centof GDP. The combination of significantly worse fiscal deterioration and delayed stabilisation of debt metrics puts downward pressure on the Bahamas credit profile.

Moodys said the new governmentsestimate of a $500 million deficit for the 2016-2017 fiscal year included revenue underperformance and expenditure slippage under the former Christie administration, as well as the impact from Hurricane Matthew.

The New York-based rating agency noted that the current fiscal years deficit was equivalent to 5.5 per cent of Bahamian economic output (GDP), and contrasted this with both the $350 million (3.8 per cent of GDP) and $100 million (1.1 per cent of GDP) estimates given by the previous government - the former as recently as March 2017.

Pointing to the obvious contrasts and contradictions between the two governments estimates, Moodys added: Through the first eight months of fiscal 2017, the deficit had reached $290 million, implying a 72per centwidening of the deficit to match the FNMs estimate in the past four months.

Authorities said that borrowing plans for fiscal 2018 will total $722 million (7.8per centof GDP) to cover unfunded spending committed in fiscal 2017, and the expected deficit in fiscal 2018. This indicates that the Bahamas fiscal position is much weaker than we had previously expected, even after accounting for the slippage caused by Hurricane Matthew.

Consequently, we no longer expect the Bahamas debt levels, which had already climbed to 67.3per cebtof GDP from 48 per centof GDP during the past five years, to stabilisebelow 70per centof GDP. Instead, we expect that they will rise at least through fiscal 2019. At these levels, the Bahamas debt-to-GDP ratio will be the highest for an emerging market sovereign rated Baa.

Moodys also described the Governments deficit reduction, and fiscal consolidation targets, as somewhat optimistic given the Bahamas four consecutive years of zero or negative economic growth.

It added: Although fiscal consolidation efforts, including boosting revenues through higher tax compliance and measures to rein in expenditures, have the potential to stabilise the debt trend, the Budget communication clearly points to a more negative starting-off point.

Additionally, there remain downside risks owing to a still-weak, albeit recovering, economy and the Bahamas susceptibility to climate-related events, such as hurricanes, that imply a fiscal cost in the absence of buffers.

The Budget envisions a somewhat optimistic deficit reduction path through fiscal 2020 without material changes to current policy, particularly in a still weak economic environment, Moodys continued.

The new government forecasts a deficit of $322 million (3.4per centof GDP) in fiscal 2018, and deficits of around 2.3per centof GDP in fiscal 2019 and 1.1per centof GDP in fiscal 2020. This compares with previous official estimates of a small deficit of $28 million (0.3per centof GDP) in fiscal 2018 and surpluses beginning in fiscal 2019.

Theonly good news from the Bahamas perspective is that it retained its investment-grade rating with Moodys - at least for the moment.

Renzo Marino, the Moodys assistant vice-president, and lead country analyst for the Bahamas, told Tribune Business that while the 2017-2018 Budgets contents were a credit negative for this nation, it wanted to assess the bigger picture as it related to economic growth and fiscal reforms before taking any rating-related action.

At this stage, the fact the Government sees the fiscal strength is weaker is definitely a credit negative from our perspective, he said in an interview with this newspaper. [But] we still want to assess a few things.

Looking at the Budget document and the projections put there, we want to wait and see how the economy performed last year to give us an idea of what future growth in 2017-2018 might be, especially in the context of Baha Mar and the boost thats expected to provide to the economy, and how this will affect the debt metrics of the Government. Based on that, well review the rating of the Bahamas.

Moodys currently rates the Bahamas sovereign creditworthiness at Baa3with a stable outlook, keeping it at one notch above junk status following a previous downgrade in August 2016.

Unlike Standard & Poors (S&P), which downgraded the Bahamas to junk earlier this year, Moodys has taken more of a glass half-full position on the Bahamas and given it time to get its economic and fiscal house in order.

That approach, though, may have been jeopardised by the suddenness, and magnitude, of the correction to the Governments fiscal estimates, which drag out the fiscal consolidation process amid an ever-increasing national debt which - when the liabilities of the public corporations are factored in - is now around 80 per cent of GDP or four-quarters of the Bahamas total annual economic output.

Mr Merino saidthat following last Augusts downgrade, Moodys had expected both the Bahamian economy to start recovering from years of weak performance and the Governments debt to show signs of medium-term stabilisation.

Even allowing for Matthews impact, the rating agency had still expected the debt-to-GDP ratio to peak this year - then stabilise - until last weeks Budget.

The incoming government presented a worse fiscal situation for the Government, Mr Merino said. One of the take aways from the communication, and this is the key, is that without any measures the debt will continue to rise for the next two to three years.

Moodys acknowledged the fiscal measures outlined in the 2017-2018 Budget, saying: The FNM government has stated that over the coming months it will perform a review of revenues and expenditures to identify opportunities for greater fiscal consolidation than what the Budget presented. Authorities also will seek to introduce fiscal responsibility legislation, strengthen procurement processes and increase overall fiscal transparency.

Mr Merino said Moodys understood that the Government would assess potential measures to reduce spending and enhance revenues within the next 90 days, and wanted to discuss these and other aspects of the Minnis administrations plans when it made its annual summer visit to Nassau.

The Moodys analysts comments underscore how theGovernment needs to restore trust in its fiscal credibility, with thenine-figure gap between the Minnis administrations projections and those of the prior government threatening to undermine business, investor and consumer confidence - as well as that of thecredit rating agencies - unless the differences were properly explained.

The Government, in unveiling the 2017-2018 Budget, revealed that the upcoming years deficit is projected to be $323 million - an almost $300 million increase from the $28 million in red ink that was forecast by the Christie administration just 12 months ago.

Raising further questions about the former governments fiscal forecasting, the deficit for the current 2016-2017 fiscal year isnow estimated to be $500 million - a five-fold increase upon the $100 million that was forecast last May, and $150 million more than the mid-year Budget estimate - given just three months ago in March.

While Hurricane Matthewplayed arole in the deficit growing 400 per cent beyond projections, the former government was accused ofexacerbating the storms impact by entering into unfunded spending commitments that had created a $300 million government payables backlog.

Based on Moodys comments yesterday, K P Turnquest, the minister of finance, was right to be concerned about how the rating agencies would react to the 2017-2018 Budget. Much now hinges on whether the Government can provide a convincing explanation when it visits.

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Moody'S Gives Alarm On 'Much Weaker' Bahamas - Bahamas Tribune