By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Moody’s is predicting that the Bahamas’ fiscal deficits over the next two years will be one percentage point of GDP higher than initially forecast, after Hurricane Matthew blew a hole in the Government’s consolidation plans.

The rating agency, in its November 2016 update on the Bahamas’ sovereign credit rating, said the damage inflicted by the Category Four storm means the Bahamas’ debt-to-GDP ratio will now not peak until 2017-2018 - a year later than originally thought.

As a result, Moody’s has increased its 2016-2017 fiscal deficit projection to 3.6 per cent of GDP, a sum equivalent to between $280-$300 million - almost three times’ the Christie administration’s $100 million Budget forecast.

And it estimated that Matthew may have inflicted $700 million in property and infrastructure damage when it hit New Providence, Grand Bahama and Andros in early October, making it necessary to revise the fiscal outlook for this nation.

This became essential after the Government was forced to undertake $150 million in unexpected borrowing to help finance hurricane relief and restoration efforts, a move that makes achieving its 2016-2017 fiscal targets highly unlikely.

“The Bahamas sustained major damage from Hurricane Matthew, which hit the archipelago in October,” Moody’s acknowledged.

“According to preliminary estimates, the damage to property and infrastructure may be as high as $700 million, part of which is covered by insurance.

“To support relief efforts, the parliament authorised a $150 million borrowing, which will include a $120 million bank loan component and a $30 million bond component. This debt will fund reconstruction of public infrastructure, compensate for hurricane-related shortfall in revenue, and support tax concessions offered to construction companies.”

Detailing the fiscal impact from all this, Moody’s said: “We have revised our projections accordingly, and now expect that in fiscal year 2017 and fiscal year 2018, the Government will post fiscal deficits that are one percentage point higher relative to GDP when compared to our baseline at the time of our August rating action.

“This will delay fiscal consolidation and, as a result, we do not expect the debt level to peak until fiscal year 2018, when it will reach around 70 per cent of GDP (gross domestic product). After fiscal year 2018, we project that lower fiscal deficits will support the stabilisation of the debt trend.”

While Matthew’s negative impact on the Government’s fiscal consolidation plans has been widely anticipated, Moody’s latest assessment is the first time anyone - locally or internationally - has tried to place this in context.

Given that one percentage point of Bahamian GDP is thought to be roughly equivalent to $80 million, Moody’s is thus estimating that the deficits for both the current 2016-2017 fiscal year, and 2017-2018, will be this much higher than anticipated.

Due to Matthew’s impact, Moody’s has increased the Bahamas’ estimated 2016-2017 fiscal deficit from 2.4 per cent of GDP it projected in August 2016 to 3.6 per cent - a full 1.2 percentage point rise.

The 3.6 per cent estimate is more than three times’ the 1.1 per cent of GDP projected by the Christie administration during its May Budget presentation, illustrating the impact natural disasters can have on government financial planning.

Moody’s is now predicting that the Government will run a primary deficit, equal to 0.6 per cent of GDP, for the 2016-2017 fiscal year, as opposed to the primary surplus forecast in August - the 1.2 percentage point negative swing on the full deficit.

The primary deficit measures the difference between the Government’s revenues and recurrent outlays on goods and services, while stripping out interest payments to service its debt.

Moody’s also raised its debt-to-GDP projections for the current fiscal year, increasing the ratio to 69.2 per cent compared to the 67.5 per cent it forecast in August. The debt-to-GDP ratio is now forecast to go higher, and peak later, than anticipated.

The positive news for the Bahamas is that Moody’s maintained this nation’s ‘investment grade’ credit rating and ‘stable outlook’ in its latest assessment, and gave no indication that this is to change in the short-term.

Standard & Poor’s (S&P), which currently has this nation in the middle of an 18-month window where there is a ‘one in three’ likelihood of a further creditworthiness downgrade, has also given no sign of taking such action.

This all suggests that there has been no ‘knee jerk’ reaction to Matthew’s impact on the Bahamian economy and the Government’s finances, and that both rating agencies are giving this country more time to get its ‘fiscal house’ in order.

But with both S&P and Moody’s currently placing the Bahamas ‘one notch’ above so-called ‘junk status’, this nation’s ‘investment grade’ rating remains under threat.

The loss of ‘investment grade’ status would be highly damaging for the Bahamas and its economy, as it would signal to the international capital markets that this nation’s creditworthiness was slipping into dangerous territory.

The Government would likely have to pay more for current and future debt issues, raising its debt servicing (interest) costs, and sucking money away from essential public and security services.

A downgrade to ‘junk’ could also deter investors assessing the Bahamas as a place to invest, as it raises questions about the Government’s economic management.

However, Moody’s said the agreement between the Government and China Export-Import Bank for Baha Mar’s construction completion and opening presented “major upside” for the Bahamian economy and its growth prospects.

“While the details of the agreement were not disclosed, the Government made it clear that it expects main facilities to open during the 2016-2017 winter season,” Moody’s said.

“Although it is unlikely that the restart of the project will provide a significant boost to the economy in 2016, it represents a major upside risk for economic growth in 2017.”

Events have also seemingly progressed further than Moody’s has allowed for, given that Hong Kong-based conglomerate, Chow Tai Fook Enterprises (CTFE), has been named as Baha Mar’s prospective buyer.

Moody’s has increased its 2017 GDP growth forecast for the Bahamas to 1.2 per cent, up from 1 per cent in August, with Baha Mar’s opening vital to maintaining its ‘stable’ outlook on this nation.

“The stable outlook also incorporates the expectation that economic performance will strengthen in 2017-2018, returning to levels close to the Bahamas’ potential growth of 1-1.5 per cent,” Moody’s said.

“Under this baseline, we would see a stabilisation of the Bahamas’ key economic and fiscal metrics, although these metrics would remain weaker than for most ‘Baa’ rating peers.”

Moody’s also noted the threat to the Bahamian financial services industry and wider economy as a result of global ‘de-risking’ trends and the termination of correspondent banking services.

“While the prevalence of subsidiaries of global banks in the financial system minimises the risk to the economy, as their correspondent relationships with parent banks are not threatened, some 25 per cent of large registered institutions face material risks of losing access to the international payment system,” Moody’s said.

“Although risks stemming from the banking system may rise should these relationships be terminated, we continue to consider that the likelihood that banking sector contingent liabilities could materialise on the sovereign’s balance sheet remains low.”