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Halkitis: Financial Future Bright

Despite international credit rating agency Moody’s once again downgrading The Bahamas’ standing by one notch, taking the grade from Baa1 to Baa2, which reflects the country’s struggling financial landscape, State Minister for Finance Michael Halkitis said Wednesday that despite the dip, there is hope for the country’s financial future.

The report on the country’s fiscal ranking was released late Tuesday and despite reporting a fall in the levels, it did note that due to fiscal reform policies in the making the financial outlook for The Bahamas was changed from negative to stable.

“While you never want to have your credit rating downgraded, we were comforted by the fact that it’s a one notch downgrade, not a double and that we maintained the credit rating of our investment grade which is very positive and that we have a stable outlook for the longer term of the economy,” he said.

“And so they came out and endorsed the government’s fiscal reform programme of restraining expenditure, improving out revenue and trying to grow the economy. They see that as a positive and so that has led to a stable long term outlook for the economy. So it’s up to us to continue along that path and make sure we have that balance between trying to grow the economy and manage finances and I think our future is bright.”

According to the Moody’s report, the key drivers of the downgrade are two-fold and include a continued deterioration of the government’s balance sheet, with debt and interest burdens that now exceed those of most Baa-rated peers and subdued economic growth, which, according to Moody’s, has been an important factor in the weakening of the government’s balance sheet.

“The first key driver for today’s rating action is related to the weakening of the Bahamian government’s fiscal strength, as reflected by the significant increase in the sovereign’s debt and interest burdens,” the report read.

“The government’s debt-to-GDP ratio has increased from 31.7 per cent in 2007 to 59.0 per cent in 2013, and Moody’s expects it to peak in 2015. At this level, it is almost 20 percentage points above the median for Baa-rated sovereigns which stood at 39.5 per cent in 2013.”

“That is high and that’s quite an increase,” he added. “They point to that as a concern so what we have to do is address it and we have been addressing it by our programme to improve revenue, constrain expenditure and to grow the economy.”

The report added that as the debt stock increased, the interest burden on government debt has risen during the same time period.

Interest payments now represent over 14 per cent of government revenues, compared to 9.3 per cent in 2007 and above the current Baa-median of 8.3 per cent.

“The deterioration of these metrics point to lower fiscal space for the government to confront any potential shocks, particularly in the current low-growth environment,” Moody’s added.

The credit rating agency said following the recession in 2008, the Bahamian economy has averaged annual growth of just 1.1 per cent in the four years through 2013 and added that the economy’s underperformance has negatively affected government revenues leading to higher current and capital expenditures by the government in order to support the economy.

Moody’s added that the stable outlook reflects their expectation that the medium-term fiscal consolidation plan will contain the government’s debt burden in fiscal 2015 and afterwards lead to a gradual reduction in the debt-to-GDP ratio.

“The rating outlook also envisages that real GDP growth will strengthen somewhat to 2.0 per cent to 2.5 per cent in 2015, owing in large part to the ongoing recovery in economic growth in the US, which is closely correlated with tourist arrivals in The Bahamas,” they said. “Key elements of the fiscal stabilisation plan include expenditure controls that seek to increase the efficiency of public spending. In addition, government intends to introduce a 7.5 per cent Valued Added Tax (VAT) in 2015.

“Nonetheless, even with an effective implementation of fiscal reforms, The Bahamas’ debt and interest burdens will remain at levels significantly weaker than most Baa rating peers over the next two years at least, and over the medium term as well.”

Ministry of Finance officials issued a release on the downgrade late Tuesday, noting that the ratings agency rightly expresses confidence that the current programme of reforms to boost revenues, and to control expenditure and increase the efficiency of spending will yield positive results.

“These reforms are indeed expected to have the intended outcome of reducing the deficit and supporting a gradual reduction in the government’s debt burden over the coming years,” government officials added. “As Moody’s expectations underscore, on this course of action the Bahamian economy should strengthen, despite worries to the contrary in some quarters about the merits of the fiscal plan.

“The Government of The Bahamas must persevere with these reforms.”

Written by Jones Bahamas

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