Bahamas ‘only now seeing the real VAT effect’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

AML Foods’ chief executive yesterday said the Bahamas was “only now seeing the real impact of Value-Added Tax (VAT)”, suggesting that its effects would “bottom out” doing the weakest point in the economic cycle.

Gavin Watchorn told Tribune Business that the 7.5 per cent levy’s true burden on Bahamian consumers would be exposed between now and September/October, given that those two months were traditionally when economic activity was at its lowest.

He added that the BISX-listed food retail and franchise group was “planning for the slowdown” whether it occurred or not, and the possibility that consumer spending - a key driver for the Bahamian economy - may “not get better” before year-end.

AML Foods largely managed to shrug off VAT’s impact for the three months to end-April 2015, as sales declined by just 1.6 per cent or $500,000 year-over-year, dropping to $34.81 million from $35.379 million.

Mr Watchorn, though, suggested that the peak winter tourism season, which coincided with AML Foods’ first quarter, had helped to shield Bahamian consumers from VAT’s worst effects.

Lower global oil prices also helped to offset VAT via lower energy and gasoline costs, but Mr Watchorn said the Bahamas was now entering a period where hotel hours were reduced, and many winter residents had headed home for the summer.

“While I think the implementation of VAT was much smoother than what people were expecting, the sky didn’t fall, there has been a consumer reaction and that had to be expected,” Mr Watchorn told Tribune Business.

“Salaries generally are not increasing, certainly not be 7.5 per cent, and we’re a very consumer driven economy.”

Tribune Business was in the past shown surveys by the College of the Bahamas (COB) suggesting that nearly two-thirds of Bahamian economic activity is driven by consumer spending.

With VAT extracting $150 million in net new revenues out of the economy for the 2015 first half, and potentially $300 million for the full year, consumers have already moved to adjust their spending patterns to compensate.

“We’re a relatively small economy, so spending is replicated significantly,” Mr Watchorn said. “A dollar spent in my store gets spent five other times. It goes into an employee’s salary, and gets spent in restaurants and at the movies.

“The knock-on effect on spending is quite significant. And when they draw back on spending, it has a major impact.

“Consumers are still in the adjustment phase with VAT, and making decisions to manage their finances to suit the circumstances that exist today.”

With reduced work weeks and hours in the hotel industry, due to the onset of the summer tourism season, Mr Watchorn said consumers were likely to feel a deeper bite from VAT as incomes and spending power reduced.

“I believe we are only now seeing the real impact of VAT,” he told Tribune Business. “The timing of VAT implementation was when we were in high season in the hotels, and there were a lot of winter residents.

“Now, the hotel workers are working less hours, and the winter residents have gone back.”

With Bahamian retailers traditionally enjoying “a couple of heavy spending periods” over the next two months, due to the summer vacation period and the ‘Back to School’ season, Mr Watchorn said these would likely provide a ‘litmus test’ for VAT’s true consumer impact.

“We’re now, over the next couple of months, going to see the real impact of VAT; the real bottoming out,” the AML Foods chief told Tribune Business.

“I think the true effects will be seen at that point between now and September and October, which are certainly the weakest points in the economic cycle, corresponding with the slower hotel and tourist season.

“We’re planning for it, whether it comes or not. We’re planning for the slowdown in consumer spending, and it not getting better this year.”

Mr Watchorn said all businesses should be making similar adjustments in preparation for a further drop in consumer spending, although he conceded: “Not everyone has that ability.”

AML Foods’ chairman, Dionisio D’Aguilar, in his first quarter message to shareholders said the BISX-listed group had “seen an immediate and noticeable impact on our sales volumes” due to VAT.

While transaction counts (volumes) had remained “constant”, average consumer spend per transaction had declined during the three months to end-April 2015.

Still, AML Foods was able to produce a slight net income increase for the quarter to $1.47 million, compared to $1.446 million the year before.

Referring back to the company’s financial struggles of more than a decade ago, which it has now put behind it, Mr Watchorn said: “If you look back at AML’s history, if someone had told me then that we’d produce the quarter we did given the introduction of VAT, I wouldn’t have believed them.”

He added that AML Foods’ investments in energy efficiency and reduced consumption were “helping to offset reduced gross margin dollars from changing consumer habits”.

“We knew VAT was coming, and we have worked quite hard on improvements to our business, knowing we expected a consumer reaction,” Mr Watchorn said.

“We’re doing a lot of good things internally that are helping to maintain our sales numbers.”

Comments

a2z says...

He ain lie. The worst of this will begin to be felt in the last 6 months of this year, leading into 2016.

Posted 16 July 2015, 12:55 p.m. Suggest removal

Thinker says...

I am in charge of 2 small businesses. We have cut our staff hours down in half. My partners are seriosly considering leaving the country. They are Bahamians of expat decent. I am losing hope as government takes even more of our earnings.

Posted 16 July 2015, 1:05 p.m. Suggest removal

BDN says...

The industry I am in has seen a decrease of 31% from last year. We are in for some seriously rough times.

Posted 16 July 2015, 2:04 p.m. Suggest removal

birdiestrachan says...

Bahamians will do well to buy only what is necessary to maintain life. When they move away from this and buy things they do not need and can not afford they make greedy merchants happy. VAT is collected in many Countries. Bahamians will get use to it. Free medicine free hospitals, Free Schools. all of this has to be paid for at some point. all who have written above knows this . So why all the complaints??

Posted 16 July 2015, 2:58 p.m. Suggest removal

BDN says...

"They make greedy merchants happy".... Wow. Of course VAT is in other countries, but they have other industries that help support their economy. What do we have? Tourism , Fisheries (not doing well either) and a dwindling banking sector? We IMPORT everything. Then we pay duty and VAT on the very items we import. You really need to look at both sides before you comment. Of course merchants want to make money. They are the ones who employ the very people you are saying should "buy what is necessary to maintain life". What does that even mean? I shouldn't be able to travel and live a lifestyle my salary can handle? I understand the poor and middles class not being able to buy certain items, but please think. If you tax the economy there will be businesses that will close. Even the businesses you assume aren't "greedy".

Also, nothing in life is "free" as you put it. You state VAT is collected to pay for "free medicine", "free hospitals" and 'free schools". How could it be free if you and I have to pay for it? Money that is being wasted on foolishness (i.e Junkanoo Carnival that went 3 million over budget and we still have no idea how much it even made). I understand that you are a die-hard PLP, but please look at the bigger picture.

Posted 17 July 2015, 11:17 a.m. Suggest removal

John says...

If there is no real growth in the economy the vat will continue to canabalise the money supply. As consumer activity dwindles more are more businesses will be forced to close. Government will also see a decrease in its revenue. Businesses who thought they could absorb the VAT and not increase their prices are finding out the hard way that they were wrong because the costs associated with VAT is more than the 7.5 percent collected. It may not all be doom and gloom but in the interim the challenge on small and medium businesses will be great to stay open.

Posted 16 July 2015, 7:32 p.m. Suggest removal

ohdrap4 says...

i find it strange that there has been no report at the tribune concerning fidelity bank's cessation of western union services.

what is next?

Posted 18 July 2015, 8 p.m. Suggest removal

SP says...

I haven't heard that about western union.

If this is an attempt of government trying to put a cap Haitian, Latino and Asian hemorrhage of USD to impoverished homelands, they are wasting their time.

These people are already organized using "mules" and various routes to smuggle cash out of the country.

Idiot government shouldn't have issued 45,000 blue collar work permits in the first place especially with 18% of Bahamians being unemployed.

Election soon come. **GOODBYE & GOOD RIDDANCE PLP JACKASS'S**

Posted 18 July 2015, 8:31 p.m. Suggest removal

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