NASSAU, BAHAMAS- A top banker says that while The Bahamas’ one-notch credit rating upgrade by Standard & Poor’s (S&P) is to be celebrated, there is no room for complacency, stressing that the real goal must be regaining investment grade status.
S&P Global Ratings has raised its long-term sovereign credit rating on The Bahamas to ‘BB’ from ‘BB-‘ with a stable outlook. Gowon Bowe, Group CEO of Fidelity Bank & Trust International Limited, said: “It is a one-notch upgrade, which is certainly to be recognized as positive and celebrated, but also to be put into context, that it is moving from one non-investment grade rating to just a better non-investment grade rating. Our objective is not what I’m going to call one-notch improvements. Our objective is really to move from non-investment grade into investment grade.”
Bowe said the real value in S&P’s action was not the single-notch improvement, but the narrative of reforms that must be pursued. “I think what is more important is the actual narrative of S&P that is effectively setting out what is expected for us to, one, maintain the level they’ve upgraded us to, but more importantly, what is needed to be accelerated and developed in order to move even further ahead.”
He pointed to S&P’s emphasis on fiscal policy. “S&P has placed significant emphasis or significant focus on the contraction in the fiscal deficit. There hasn’t been any great confidence expressed in there being a surplus, but there certainly is the recognition that the deficit, in the absence of extra-normal or extraordinary events like hurricanes, has certainly been decreasing. There’s also been a recognition that there has been the ability to refinance foreign currency debt successfully and at moderate interest rates. I wouldn’t say overly advantageous interest rates, but moderate interest rates.”
Bowe also highlighted the critical role of energy reform. “I think there’s significant reliance on the energy reforms and the ability to leverage that for the purposes of stable power at a more reasonable cost that will allow for, if you will, relief of certain economic activity. It must be recognized that most businesses see the cost and instability of energy as being the biggest drawback to advancement, and why I say that is because there’s a cost to the energy itself, which has been high and elevated, but the cost of securing against instability in terms of generation or private generation, with generators and the like, has increased the cost of most businesses because you basically have to maintain two energy streams, one from the power provider and one in their private capacity, which has a negative consequence.”
Bowe said the fragility of the tourism sector was another point rightly flagged by S&P. “The other elements that certainly are worth looking at, S&P has recognized the fragility of tourism in the face of possible global economic downturns, particularly in the United States. So the elevated inflation, the potential impact that inflation can have on the interest rates that we see already in the U.S. now with great volatility because there has been a reduction in the interest rates to try and stem some of the slowdown and decreases in employment and some of the slowdown in the economy. But at the same time, the Fed has expressed that they need to monitor inflation, so interest rates are unlikely to be reduced rapidly until inflation has sort of consistently and persistently stabilized. So that’s going to create higher cost environments, interest cost environments, at least for the next 12 months. And when you combine that with inflation, there is certainly the negative impacts that will happen in tourism.”
He added that S&P had underscored the importance of implementing the country’s corporate minimum top-up tax. “One of the areas I did fail to mention that the S&P is placing very high reliance on [is] a domestic minimum top-up tax, which is effectively the corporate income tax. Tthat has been introduced. It has been enacted in law, but it has not yet been put into place. I think there will be keen attention placed on whether that’s a signal to a wider corporate income tax initiative for the country, but certainly it is an incredibly inclusive framework and pillar, too. And so from that perspective, I think the government needs to spend the time, not, I’m going to say, praising the one-notch upgrade, but articulating its plans to continue that trajectory so that we can see that there is a clear path to investment growth.”
Bowe said the government must remain focused on realistic fiscal targets and long-term planning. “I think the emphasis needs to be on the steps the government will take to continue the fiscal contraction to bring a deficit as low as possible and ideally turn it to surplus, but with what I’m going to call more realistic expectations. I think the unemployment is just a whole football that is nonsensical in this discussion because the actual statistics themselves need to be analyzed. But certainly we have to keep the economy growing so that there’s an ability to tax it…And you know what I’ll always say, that’s in the form of a national development plan, which allows us to lay banknotes for a generational period of 25 years or more.”
According to S&P, its latest upgrade reflects The Bahamas’ “progress in reducing fiscal deficits, stabilizing its debt-to-GDP ratio, and successfully refinancing external debt.” The agency added: “We expect The Bahamas to maintain its fiscal consolidation efforts and debt stabilization over the next several years. However, the country’s high reliance on tourism, vulnerability to external shocks, and challenges in the energy sector remain constraints on the rating,” S&P noted.
S&P stated that the stable outlook “balances The Bahamas’ progress in strengthening its fiscal position and access to external financing against its vulnerability to external economic conditions and natural disasters.”
Meanwhile the government said it “welcomes this upgrade as a recognition of its fiscal responsibility and reform agenda, while remaining committed to further strengthening the economy, diversifying growth, and improving resilience.”
