S&P Lowers Bahamas’ Outlook to Negative, Points to Weakening Fiscal Profile

Above: downtown Nassau (CJ Photo)

By the Caribbean Journal staff

Standard & Poor’s has revised the outlook on its long-term rating on the Bahamas to negative from stable, the ratings firm announced Monday.

The revision reflected the firm’s view that “the government’s fiscal profile has continued to weaken,” according to credit analyst Lisa Schineller.

“The government deficit, instead of peaking and starting to decline, rose even further in the fiscal year ended June 2012,” she said. “Capital expenditure overruns — essentially on the New Providence roads project — and continued sluggish growth in recurrent revenue pushed the general government deficit to an estimated more than 7 percent of GDP.”

S&P affirmed its “BBA-A-2” sovereign credit ratings and “BBB+” transfer and convertibility assessments in the announcement.

The firm said it considered $86 million in capital revenue as “below-the-line” deficit financing, in contrast with the government’s budget documents.

It expects a general government deficit of about 6.7 percent of GDP for the fiscal year ending June 2013.

“We don’t expect overruns associated with capital projects to moderate until the following fiscal year (ending June 2014), when the deficit could fall toward 4.4 percent of GDP,” Schineller said.

S&P also said that the country’s May general election, which was won by the Progressive Liberal Party, complicated efforts to lower the deficit more quickly.

“The new government sees little room to make a larger near-term adjustment, beyond some expenditure and revenue efficiencies, and it wants to advance some of its own new programmes,” she said. “However, the administration has stated its commitment to reduce the deficit during its term in office. An important component appears to be a potential tax reform.”

The firm’s negative outlook reflected what S&P called an “increased likelihood of a downgrade” if the government does not take action to lower the country’s fiscal deficit and mitigate the “arrest the increase in debt to GDP over the next several years.”

“A weakening in our current assessment of the Bahamas’ generally strong commitment to deliver sustainable public finances and economic growth could lead to a downgrade,” Schineller said. “Conversely, the ratings could stabilize at the current level if the government takes a more proactive policy response to reduce debt or if the Commonwealth’s economic prospects strengthen.”

The firm pointed to the Bahamas’ “low and narrow revenue base” of about 20 percent of GDP, due to a lack of personal income or value-added tax.

“Enhancing that revenue base has been politically challenging and more recently limited by the timing of the general election,” she said.

Without reform to “broaden” the tax base, the firm said deficits would likely remain at higher-than-anticipated levels.

In October 2011, the firm lowered the Bahamas’ sovereign credit rating and revised its outlook to stable.