• Santander: ‘Decelerate’ to hit $575m deficit

• But hails ‘remarkable recovery’ for tourism

• ‘Huge credibility boost’, warns of ‘slow fix’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas must produce “a faster slowdown on spending” to ensure it hits the revised $575.4m full-year deficit target and other key fiscal goals, a major international financial services group is urging.

Santander’s US capital markets unit, in a March 10 research note on The Bahamas to its institutional investor clients, warned that “spending needs to slow” in what was otherwise a relatively upbeat assessment on the country’s “remarkable recovery” in tourism and year-over-year improvement in government revenues as the economy emerged from COVID’s ravages.

However, it said the $124.7m revenue increase for the 2022-2023 fiscal year’s first half “has not been sufficient to compensate” for a 26 percent year-over-year increase in total government spending during the three months to end-December 2022. During this period, Santander said the total deficit had increased by 75.2 percent year-over-year - from $145m in the 2021 calendar year’s fourth quarter to $254m in 2022.

“There is no immediate threat to the full year 2022-2023 fiscal targets on still six months remaining, and the July to December 2022 deficit of $281m at 49 percent of the full-year budgeted deficit of $564m,” Santander said in its Bahamas investor note, headlined ‘The revenues are robust but spending needs to slow’.

“However, the current pace of spending is not sustainable and there isn’t much flexibility against any shocks or budget seasonality. The next few months of data needs to reaffirm a faster slowdown on spending to reassure full-year Budget compliance. The medium-term fiscal projections rely upon higher trend revenues. However, the fiscal year 2022-2023 adjustment depends on lower spending.” The half-year revenue increase has largely been consumed by higher spending.

Simon Wilson, the Ministry of Finance’s financial secretary, told Tribune Business that the Davis administration has no worries over its level of recurrent spending or ability to hit the year-end deficit target and other vital fiscal indicators.

“There’s no concern over recurrent expenditure,” he emphasised. “Recurrent expenditure as a percentage of GDP has gone down by 1 percentage point.” Recurrent spending, which largely covers the Government’s fixed costs such as salaries, rents and personal emoluments, has reduced from 12.6 percent of gross domestic product (GDP) to 11.6 percent during the 2022-2023 fiscal year’s first half, Mr Wilson added.

The reduction, though, has largely been driven by the increase in economic output or GDP as the economy reflates post-COVID. Total spending during the 2022-2023 fiscal year’s first half rose by $119.3m year-over-year, including a $105.3m increase in recurrent expenditure, even though the Government has been able to sharply reduce social assistance and business/unemployment support related to COVID-19 as the pandemic and associated restrictions ease.

Michael Halkitis, minister of economic affairs, during his mid-year Budget debate contribution in the Senate last Thursday, argued that there was often a tendency to view government spending - and any increases in it - solely as an extra cost despite the fact these monies were often spent with Bahamian businesses and thereby increased economic activity.

Dissecting the recurrent spending increase to $1.417bn for the six months to end-December 2022, he said $42.4m of the $105.3m jump came from a “higher public service wage bill” sparked by staff increases, salary adjustments, industrial agreements with the likes of the nurses and teachers, the minimum wage rise and increments and promotions.

This $42.4m “went directly into the pockets of workers”, the minister added. There was also a $24.1m increase in government spending on goods and services, and a $41.1m jump in the Government’s interest payments on its debt to $280m. “In an environment of rising interest rates, we see interest payments rising and still the necessity for the Government to borrow money,” Mr Halkitis said. “Unfortunately the debt remains at elevated levels, so we have to spend more money.”

He added, though, that reducing or cutting public spending too drastically - especially the civil service wage bill, and expenditure on goods and services - could have negative consequences for a small economy such as The Bahamas where the Government accounts for a significant percentage of economic activity.

“The majority of that is being spent with Bahamian businesses, putting money into the economy,” Mr Halkitis said. “We shouldn’t always look at spending as how much something costs, as a negative, because you’re spending within the economy.”

Asserting that the Government was “on course” to achieve its moderately-increased deficit target of $575.4m for the full year, the minister added that the $4.9m primary budget surplus achieved during the 2022-2023 first half meant The Bahamas was no longer “on the slippery slope” of having to borrow money to pay interest on its existing debt.

The primary surplus measures by how much the Government’s revenues exceed recurrent spending when interest or debt servicing costs are stripped out from the latter. “For the first half of this fiscal year, the primary balance reflected a surplus of $4.9m,” Mr Halkitis said. “If you’re running a primary deficit, you’re borrowing money to pay interest.

“It’s a slippery slope and bad situation to be in. When you reverse that, and run a primary surplus, you no longer need to borrow to pay interest. You run a primary surplus for several years, and you start to see your debt go down. That is a very, very positive sign.”

The pace of government spending was the major, but largely only, concern in Santander’s analysis of The Bahamas’ fiscal position and wider economy. It added that the early 2023 tourism performance, with arrivals up 33 percent for January compared to the same month in 2019 pre-COVID, made forecasts of a 20 percent increase in tourism numbers for the full year “seem conservative”.

“The strong recovery in tourism remains the backbone for economic growth and fiscal consolidation,” Santander said. “The latest data for January 2023 shows an almost three times’ increase from January 2022 with 12-month rolling tourist arrivals of 7.5m. The departure tax through the first half of fiscal year 2022-2023 is running at 74 percent of the Budget. This provides some budget flexibility on a mature phase of economic recovery elsewhere in the region.”

The 7.5m figure exceeds the record 7.2m for total visitor arrivals received by The Bahamas during a calendar year, which was 2019 and pre-COVID. “The tourism data starts the year strong with almost one million visitors in January,” Santander added. “The builds upon the remarkable recovery from 2.1m tourists in 2021 to seven million in 2022.... This jumpstart to the year makes the official 20 percent target seem conservative for 2023.

“The visitor arrivals now far exceed 2019 levels with growth trajectory dependent on an easing of prior bottlenecks including more frequent flights from the US and further foreign direct investment (FDI) in the tourism sector. There is still spare capacity with the hotel occupancy rates increasing from 47.9 percent in January 2022 to 55.7 percent in January 2023.

“The release of the first half fiscal data reaffirms the importance of the strong economic momentum, especially on the frequent criticism that revenue collection and growth projections are optimistic.” Santander said “revenue collection remains quite robust” following a total 12 percent year-over-year increase in the 2022 calendar year’s fourth quarter, which was achieved by a “7 percent year-over-year deceleration” in VAT revenues.

This, though, was offset by a 40 percent rise in international trade taxes and revenue rises elsewhere. However, spending concerns were never far away. “This has not been sufficient to compensate against the 26 percent year-over-year increase in overall spending in the 2022 fourth quarter, with the overall deficit increasing from $145m in the 2021 fourth quarter to $254m in the 2022 fourth quarter,” Santander added.

“The Government continues to unwind the COVID-related spending on subsidies and social assistance. However, all the other categories are higher, including wages and debt service.... The resurgence of higher spending needs to decelerate in the second half of fiscal 2022-2023 to comply with the annual Budget deficit and to remain on the trajectory to reach fiscal surplus in 2024-2025.”

The Davis administration will likely take encouragement from Santander’s assessment that it is on the right course, albeit a fiscal turnaround will take some time to complete given the scale of the task and an $11.036bn central government debt.

“The Bahamas is still heading in the right direction but it’s a slow fix on reverting the fiscal deficit to surplus (fiscal year 2024-2025) and slowly working down the debt ratios (fiscal year 2030-2031),” Santander said, the latter year referring to when the debt-to-GDP ratio is forecast to hit 50 percent in line with the Fiscal Responsibility Act’s goals.

“There has been a huge credibility boost on policy management..... The Bahamas is not likely to relapse into crisis, and should be more resilient to a US economic slowdown,” it concluded.