A fiscal crisis made worse by COVID-19

As healthcare workers continued to battle on the frontline of the COVID-19 war, in 2021 the government and finance experts were forced to take up arms to strategize how The Bahamas would combat an economic problem of mammoth proportions, a national debt exceeding $10 billion and a 100 percent debt to gross domestic product (GDP) ratio.

The economic crisis had already been pummeling the country for seven months at the start of the year, when the government, faced with the increasing needs of unemployed citizens and businesses hanging on by a thread, said substantial borrowing would be needed in the year ahead.

It did not exaggerate.

While at the start of the year the fiscal deficit had grown by a staggering 279.4 percent to $736.1 million, by March, because of the continued need to borrow, the deficit ballooned again to $878.2 million and the national debt reached $9.5 billion, nearly 83 percent of the country’s gross domestic product.

Despite the worrying escalation in the deficit, then-Prime Minister and Minister of Finance Dr. Hubert Minnis in his 2021/2022 budget communication in May vowed that his “responsible government” will return the nation to fiscal consolidation and reduced debts.

He said the government will stay the course and maintain the plan laid out in the Fiscal Strategy Report in December 2020 as he tabled a resolution for the government to borrow $1.3 billion to finance its obligations.

Minnis said his administration’s Accelerated Bahamas Recovery Plan would boost economic growth and continue to offer support for the most vulnerable.

Not everyone, however, was convinced of the fiscal strategy.

A few weeks later, Marla Dukharan, a noted and well regarded regional economist, charged that “The Bahamas is in the midst of the worst crisis in its history,” and at risk of defaulting.

CFAL President Anthony Ferguson, meanwhile, warned that “there is a Category 5 financial hurricane approaching this country and no one seems to have any concern.”

The grim outlook was not farfetched.

Scenarios

Days after the September 16 general election, the Central Bank of The Bahamas revealed that the national debt, at $10.4 billion, had surpassed the size of the economy at a destabilizing 100.4 percent debt to GDP ratio.

With an election came a new government, and a new fiscal strategy.

The Progressive Liberal Party (PLP) in its “Blueprint for Change” promised economic reforms to “rescue the economy”, chief among them a plan to reduce value-added tax (VAT) from 12 percent to 10 percent, which the party said would streamline revenue collections and spur an uptick in consumer spending which it projected would result in an $80.6 million improvement in VAT receipts.

Immediately after its election win, the Philip Brave Davis-led PLP administration was faced with the first of two credit rating downgrades The Bahamas would endure in 2021.

Credit rating agency Moody’s downgraded The Bahamas to junk status from Ba3 to Ba2 with a negative outlook.

Moody’s said its negative outlook was reflective of the ongoing risks to the country’s credit profile based on the pace of fiscal consolidation, which it said would result in higher borrowing requirements and exacerbate funding risks if tourism did not recover quickly enough.

The new Davis administration got to work developing a supplementary budget that was tabled and passed in Parliament last month, touting it as a plan to stabilize the nation’s finances.

Minister of Economic Affairs Michael Halkitis assured as well that there is no plan for an increase in the level of borrowing this fiscal year, and because of the expected high cost of external borrowing, the Davis administration has said it will exhaust its local options for bond offerings.

The supplementary budget also laid out the government’s aim to increase the revenue base to 25 percent of GDP by 2025.

Moody’s was listening, and issued an analysis noting that while it believed an increase of that size would be credit positive, achieving it through improved tax compliance is unlikely.

Last month, global credit rating agency Standard and Poor’s (S&P Global) also downgraded The Bahamas’ sovereign credit rating to B+ from BB-, however this time with a stable outlook.

S&P Global said it gave a stable outlook because of the healthy rebound in tourism.

However, it gave the best and worst case scenarios for economic growth, noting that under a worse-case scenario, the government’s inability to close budget deficits over the next 12 months could mean a further downgrade; or on the upside, it could raise its rating by next year if the government “establishes 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”.

If tourism trends continue as they are, the latter of those scenarios could prove true for The Bahamas.

The Ministry of Tourism has projected an estimated one million stopover visitors could be possible in 2021, following dismal numbers in 2020.

And, despite the surge of the new COVID-19 variant Omicron, interest in travel to The Bahamas and the wider Caribbean remains at higher levels compared to the rest of the world.

While The Bahamas may be ending the year 2021 with a surge of COVID-19 cases, it is also ending the year on a promising financial stance as thousands flock to the nation’s shores to escape the ongoing battlefield that is COVID.

Both major hotel properties, Atlantis and Baha Mar, have reported close to 100 percent in bookings for this final week of the year and Minister of Health Dr. Micheal Darville has stressed the need to balance health and safety measures with an open and robust economy.

It is uncertain what lies ahead in 2022 for The Bahamas and its fiscal position, but some things are certain; beginning January 1, VAT will be reduced from 12 percent to 10 percent on almost everything consumable, making the cost of living ever so slightly more bearable for tens of thousands of struggling Bahamian citizens and businesses.

Additionally, The Bahamas remains in the top 10 of desired destinations for travel for millions of Americans who, frustrated by endless lockdowns and travel restrictions, are ready to take to the skies again and bury their toes in this nation’s sandy shores.

Those tens of thousands of tourists would translate into millions in revenue uptake for the government.

And finally, The Bahamas has proven over and over again that it can withstand all that has been put up against it, not defaulting once on any of its obligations as predicted by economists, and maintains a level of political, economic and social stability that makes it the envy of its regional and global counterparts.

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