Moody’s: Government must address fiscal policy credibility

The recent credit opinion released on The Bahamas by Moody’s only highlighted the points that have been repeatedly raised by the Bahamian people. In maintaining our sovereign rating at Baa3 with a negative outlook, the rating agency focused on the fundamentals and prospects of the Bahamian economy under the current administration.

There were hardly any new revelations in Moody’s report that calls for the commendation of the Government. On a positive note, the rating agency acknowledged The Bahamas’ strong institutional framework, the policy credibility of the Central Bank and macroeconomic stability. It was also noted that in comparison with our peers within the same rating category, certain key indicators were found to be lagging behind. In relation to economic growth, The Bahamas had an average growth rate of 0.6% between 2011 and 2017 when compared to peers’ average growth rate of 3.1%. The Bahamas’ debt-to-GDP rate was estimated at 58% in fiscal year 2017/18 compared to the median for Baa-rated sovereigns of 47.8% in 2017 and interest-to-revenue was estimated at 13.6% when compared to the Baa median of 8.2% for the same period. This was reflected in the low rating assigned to The Bahamas’ economic strength, fiscal strength and susceptibility to event risk.

According to Moody’s, “the negative outlook reflects potential downside risks to the fiscal consolidation process posed by weaker-than-expected growth, exposure to climate-related shocks in the form of hurricanes, and implementation risks associated with measures to rein in expenditure growth and increase revenue intake.”

In the absence of an articulated economic growth plan, a robust national disaster risk management framework and demonstrated commitment to fiscal prudence, it is difficult to envision how the current administration will be able to address the concerns raised by Moody’s. Further, the absence of these vital elements undermines the ability of the Government to reverse the negative outlook, stave off any further downgrades of our sovereign rating or improve our existing rating.

Moody’s also raised concerns about contingent liabilities stemming from state-owned enterprises (SOEs) and Bank of The Bahamas (BOB). It is common knowledge that SOEs are being subsidized by taxpayers to the tune of approximately $400M annually and the albatross that is BOB has been a drain on public finances over the years. However, there has been no concrete or feasible plan produced to decrease and ultimately eliminate the amount of public funds expended on these ventures.

The fiscal policy credibility of the Government was also under scrutiny by the credit rating agency. “In our assessment, the government’s small size limits its capacity to formulate and effectively implement fiscal policy, as evidenced by material deviations from fiscal policy targets. Uneven transparency regarding fiscal numbers in recent years, particularly with respect to arrears, also weighs on fiscal policy credibility.” We submit that the Government’s response as contained in the press release was patronizing, weak and grossly inadequate. The statement failed to properly address the points raised and provide an action plan for rectifying them. Additionally, it failed to dispel the notion that the Government is not equipped to formulate an effective fiscal policy.

The Government will do well to ensure that going forward, all financial, economic or policy decisions are supported by proper modelling with credible and reasonable forecasts on the impact on growth projections, the GFS deficit, debt levels and the overall fiscal consolidation process. In the absence of such an approach, the downward pressure on our sovereign rating will persist and may result in a downgrade.

It is our view that while the opinion and rating provided by rating agencies should receive our urgent attention due to their impact on investor confidence or perceptions, the Government has a bigger obligation to the Bahamian people to properly and competently manage the economy. Current and future generations of Bahamians will be impacted by ill-advised decisions or actions made in relation to our economy.

 

Arinthia S. Komolafe, Deputy Leader

Democratic National Alliance