DEBT DIDN’T DISAPPEAR: Moody’s expects PLP to continue former admin’s fiscal consolidation efforts

DEBT DIDN’T DISAPPEAR: Moody’s expects PLP to continue former admin’s fiscal consolidation efforts

Credit ratings agency: It is very unlikely that govt will be able to reverse the rise in debt over the past 2 years

NASSAU, BAHAMAS — Credit ratings agency Moody’s said it is “very unlikely” that the Bahamian government will be able to reverse the rise in debt over the past two years, noting that the recent election outcome is unlikely to materially shift the government’s fiscal consolidation efforts.

The ratings agency said yesterday that despite the transition to a new government, it expects broad policy continuity, particularly in the government’s commitment to fiscal consolidation and adherence to its fiscal rule and medium-term debt targets.

Progressive Liberal Party (PLP) Leader and Prime Minister Philip Brave Davis.

“The PLP’s (Progressive Liberal Party) ‘Recover, Rebuild, Revolutionize’ economic plan emphasizes stimulating growth and boosting resiliency through initiatives ranging from tax measures to support for small businesses and increasing competitiveness,” Moody’s said.

“The economic plan focuses on stabilizing public finances and prioritizing increased tax collection in areas such as property taxes.

“The Bahamas’ growth prospects are tied to tourism activity, which, although improved in recent months, is still well below pre-pandemic levels. Our baseline expectation assumes tourist arrivals — stopover arrivals — remain close to 75 percent of 2019 levels for the remainder of this year, leaving 2021 tourist arrivals at around 50 percent of 2019 levels.”

Moody’s added: “Assuming continued recovery in 2022, driven mainly by increased vaccinations and greater comfort with international travel, we expect The Bahamas to have another year of very high economic growth rates.

“We expect GDP growth of eight percent in 2021 and seven percent in 2022 after the 14.5 percent contraction in 2020. We expect stopover arrivals to return to 2019 levels by 2024, while cruise visitors will take longer to recover.”

The ratings agency said it expects fiscal policy to be anchored by reforms enacted in recent years to improve the government’s institutional and fiscal policy framework.

“These measures include a set of fiscal rules, improved fiscal data dissemination standards, new procurement guidelines and new debt management legislation,” it said.

“The Fiscal Responsibility Act (FRA) included an original fiscal consolidation program that set a fiscal deficit limit of 0.5 percent of GDP as of fiscal 2021, which ended 30 June, 2021, in addition to capping the growth of current expenditure to the long-term rate of nominal GDP growth.

“The FRA sets a long-term objective to reduce the debt/GDP ratio to no more than 50 percent.”

Moody’s said that while Hurricane Dorian and the coronavirus pandemic have delayed achieving the aforementioned fiscal targets, it expects the government to remain committed to achieving them over the medium term.

“Even if the targets are ultimately not achieved, they will serve to anchor fiscal policy,” said Moody’s.

“We expect the PLP-led government to continue to prioritize fiscal consolidation and reducing the government’s debt burden over time.

“Over the remainder of fiscal 2022 and in fiscal 2023, we expect fiscal consolidation driven mainly by the normalization of economic activity, and particularly tourist activity, which will increase revenue, and the removal of pandemic-related spending.

“The pace of the economic recovery will directly affect the pace of fiscal consolidation and how quickly debt begins to decline.”

It further noted that the economic contraction in 2020 and relatively slow recovery will leave The Bahamas with a significantly higher debt burden compared with its pre-pandemic debt levels and significantly weaker fiscal strength than similarly rated peers.

“We think it very unlikely that the government will be able to reverse the rise in debt over the past two years, although the debt burden likely peaked in fiscal 2021 and will gradually decline beginning in fiscal 2022,” said Moody’s.