The affirmation of the country’s B+vrating coupled with a stable outlook by S&P is an important shot in the arm for The Bahamas. Against the backdrop of improved performance of the country’s foreign currency bonds, there are clear signs that the economic side of the economy is on a sound path back to its pre-pandemic levels. The ratings, a nod to speed of the economy reconsolidation and the economic policies of the government, is an important counterbalance to the recent Moody’s downgrade. This more positive pronouncement should set the stage for greater acknowledgement of, and emphasis on, the financial side of the equation.
Undoubtedly, this outcome should be celebrated. Having faced two major economic shocks and suffered a series of consecutive downgrades this is a significant change for the country. The assessment is indicative of the depth of the reconsolidation and the fact that the administration has to date projected and managed the fiscal affairs of the country with targeted outcomes of reduced fiscal deficits and consequently a slowing in the rate of growth in the national debt.
Despite some expressed doubts, the S&P ratings is in many regards a validation of the soundness of the Government’s fiscal strategy which is geared at securing surpluses and maintaining a relatively tight rein on expenditure over the midterm. It augers well for the economic side of the country’s finances. The doubt surrounds the ability of the government to reach its stated 25 percent revenue to GDP target “without new taxes and material expenditure cuts”. While I share similar concerns about the difficulty, proper assessment demands that due regard should be taken of the fact that the Government’s strategy has never excluded the possibility of increased taxes but rather stated it as an option of last resort.
As with most ratings, we are often absorbed with the bottom line pronouncements and fail to give sufficient emphasis to other critical factors. A useful starting point for any such assessments is the stated basis on which a downgrade would result. In this regard, S&P noted, “We could also lower the ratings if we believe that The Bahamas’ access to external liquidity will deteriorate sharply and suddenly.” Therefore, the ability of the country to borrow represents a significant consideration, a matter that clearly hinges on calls for greater financial reforms and a need for more robust economic growth.
The continuation of this assessment should naturally turn to the basis on which an upgrade could be realized. According to S&P, “We could raise the ratings over the next 12 months if the government advances faster than we expect to establish a track record of enacting meaningful financial reform, demonstrating an ability to raise revenues and leading to sustained near-balanced financial results and improved economic prospects.” In other words, the lack of reforms, uncertainty around the level of fiscal revenue and economic growth would result in The Bahamas enjoying improved credit ratings. This should be instructive for policy makers who should have a respectful appreciation of the fact that the reconsolidation is expected to plateau faster than originally anticipated with growth rates cut to 1.1% for 2023.
The other major issues are easily gleaned by a careful read of the ratings report. Some of the important highlights include interest expenses, being more than 15 percent of total expenditure expected to continue at this elevated level with the adverse effect of crowding out other critical expenditure of the government. According to S&P, the current sovereign rating reflects the country’s below average growth rate when compared to peers at similar stage of development. Clearly, this must feature prominently in all discussions about improved ratings.
The report noted that the rapid buildup of external debt may render the country’s consolidation plan inadequate to meet debt targets in the absence of increased revenue, material expenditures cuts and improved above average growth. On assessment, this suggest that the financial side of the fiscal arrangements, though improving, is likely to remain in a weakened state. Ultimately, as I would have opined before, the fortunes of the country over the near term will turn on the ability to deploy an effective debt management strategy, which is itself, highly dependent on economic performance and growth. This is of necessity a circular argument, a fact that underlines the complexities involved and the potential challenges faced.
As fundamental as the preceding issues might be, perhaps the most critical point made in the report is the extent to which successive administrations approach to reforms has influenced the level of national debt. Additionally its expressed lack of confidence for a change in this historical experience represents a telling point but also one of great opportunity for policy makers and the country. In S&P’s own words. “We believe the country’s track record of slow progress in reforming public finances and key sectors of the economy has contributed to the weakening of its financial profile over many years and hurt its economic performance. Most notably, failure to advance public financial reform has led to a marked increase in the sovereign’s debt burden.” By implication a shift towards greater reforms, including SOEs, hold great value for the country’s risk profile and by extension the quality and affordability of its debt stock.
It is important that as a country, given the significant financial crisis just experienced, that all positives should be held up as important milestones of progress. We must be mindful however not to ignore the cautionary points. The national debt is high and while it will reduce percentage wise, will remain at an elevated level in absolute terms and the country still have significant needs for both financing and refinancing. The space created by this rating should create greater confidence in not only articulating the debt strategies going forward but also a comprehensive assessment of the limitations it imposes and their potential impact on overall fiscal outcomes.
While there is significant domestic excess liquidity, the traditional lenders to government have constraints of prudential norms. The elevated level of spend on financing cost will have adverse impact on the ability to chart and realise social and economic ambitions. The country’s social security safety net is under pressure and its value is on the decline. Each of these ideas, aptly stated in the report, are directly tied to the country’s debt circumstance and consequently a reasonable and balanced analysis must take into account not only the economic side of the equation but also the financial strength (ability to meet obligations) of the country’s fiscal apparatus.
Unlike Moody’s, S&P in my view has delivered a more balanced and thoughtful rating, properly reflecting a stable outlook, which appears to be the most logical conclusion with the country returning to pre-pandemic levels, and experiencing some measure of growth. We must however be mindful of the fact that there is a lot of work needed to chart the path forward. Reforms are, and will remain until effected, the most critical long-term driver for improved performance. The Governor of the Central Bank puts is potently when he stated, “Once the COVID rebound is completed, the growth outlook is expected to reduce back into line with The Bahamas’ medium and longer-term potential. Hence, the policy challenge is to improve the medium-term growth potential.” The COVID rebound is ending and the question is how we will adjust upward the growth potential of the country on which everything lies.
Now is the time to address these things which we have failed to do for decades and which if there is continued delay will ultimately retard economic performance and prospects for a more resilient economy capable of better absorbing the consistent external and climate related shocks. A failure to create this shift will retard the country’s growth potential.
• Hubert Edwards is the principal of Next Level Solutions Limited (NLS), a management consultancy firm. He can be reached at info@nlsolustionsbahamas.com. Hubert specializes in governance, risk and compliance (GRC), accounting and finance. NLS provides services in the areas of enterprise risk management, internal audit and policy and procedures development, regulatory consulting, anti-money laundering, accounting and strategic planning. He also chairs the Organization for Responsible Governance’s (ORG) Economic Development Committee. This and other articles are available at www.nlsolutionsbahamas.com.