NASSAU, BAHAMAS — Rating agency Moody’s has offered a more cautious outlook of the Davis administration’s fiscal performance, outlined in the upcoming budget, noting that revenue, expenditure and fiscal consolidation projections face “key risks” in the absence of broadening the tax base and its “overly optimistic” revenue expectations.
Prime Minister Philip Brave Davis delivered the budget communication last Wednesday as the government laid in Parliament its 2022/2023 budget.
The government expects a significant rebound in the Bahamian economy, with a projected $2.8 billion in revenue yield in the upcoming fiscal period, and $3.1 billion in the following fiscal year.
Meanwhile, the government projections recurrent expenditure to hold at $2.9 billion, though it will spend some $3.3 billion in the upcoming period.
Moody’s acknowledged that government spending likely increased in the fiscal period 2021/2022 because of clearing arrears left by the previous administration.
It said stronger revenue collection more than offset the increased spending, resulting in the fiscal deficit narrowing to six percent of GDP (gross domestic product — down from 7.4 percent based on the medium-term fiscal outlook.
In the first nine months, revenue stood at $1.85 billion, a 50 percent increase compared to the fiscal period 2020/2021 during the peak of the pandemic and its associated restrictions, business closures, and lockdowns.
“The favorable results, supported by post-pandemic normalization of economic activity and tourism inflows, led to a $210.6 million increase in the fiscal 2022 revenue estimate,” the ratings agency said.
“This offset a roughly $251 million increase in spending (relative to the December supplementary budget) to pay down arrears and other unsettled claims of around $1 billion — nearly eight percent of GDP — at year-end 2021.
Moody’s said without the increased spending, the projected deficit for the fiscal period 2022 would have narrowed to just four percent of GDP.
But Moody’s said key risks to the budget were “overly optimistic revenue collections projections” in the absence of concrete measures to broaden the tax base, as well as the inability to manage spending in line with the targets.
“Specifically, the government expects to keep primary recurrent spending unchanged over the next two fiscal years, which would reduce real spending given 15 percent nominal growth over the same period,” Moody’s said.
“Also, the government’s assumptions for interest expenditure imply a decline in the average cost of debt, despite a rising global interest rate environment.
It said the economic recovery is a key driver for the government’s narrower projected deficit in the upcoming fiscal period, noting that a continued increase in tourism inflow will drive that recovery at the same time as construction and foreign-led investment projects ramp up.
“These factors, in addition to increased tax collection supported by the re-introduced Revenue Enhancement Unit, underpin the government’s expectation that recurrent revenue will expand by 28.6 percent by fiscal-year-end 2022 and 14.1 percent in fiscal 2023,” read the report.
“Although these factors are supportive for increased revenue in fiscal 2023, the budget did not include an increase in taxes, posing risks to the government’s medium-term projections.”
Moody’s pointed out that the government, without an increase in taxes, projects that recurrent revenue will reach 24 percent of GDP by fiscal year-end 2025, 4.4 percentage points higher than fiscal 2022 and 5.4 percentage points more than in fiscal 2019.
“As we have noted previously, the government’s revenue assumptions may prove overly optimistic, leading to a more gradual fiscal adjustment.
“On the expenditure side, the government projects that recurrent primary expenditure growth will be close to unchanged over the next three years.
The government has projected that its recurrent expenditure will decline over the next three fiscal periods by around one percent each fiscal year.
Moody’s said this restraint in spending with higher revenue would narrow the deficit.
It said while it expects the government to constrain expenditure growth, “the magnitude of the reduction in spending implies a much more restrictive fiscal policy stance, which will weigh on growth”.
It also said considering the financing needs and liquidity risks will be elevated over the next two years, an increase in borrowing costs would increase expenditure, resulting in a larger fiscal deficit.
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