By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Moody’s shrugged off the Government’s $400m-plus deficit for the first seven months of 2024-2025 by asserting that the past two years’ reductions outweigh any “slippage” from the full 12-month target.

While admitting that the Davis administration’s half-year fiscal performance was “mixed”, and the Government faces “some risks” over hitting both its $69.9m full-year deficit target and revenue goals, the credit rating agency nevertheless gave it the benefit of the doubt regarding its financial position for 2024-2025 to-date.

The credit rating agency, in an April 11, 2025, update following last Tuesday’s decision to raise outlook for The Bahamas’ sovereign creditworthiness from ‘stable’ to ‘positive’, forecast that the Government will likely overshoot its full-year deficit target by projecting this will now hit the equivalent of 1.1 percent of gross domestic product (GDP).

Given that the Government’s $69.8m target is equal to 0.5 percent of Bahamian GDP, or economic output, Moody’s is projecting that the deficit - which measures by how much government spending exceeds revenue income - will ultimately be slightly more than double that dollar figure. Based on the 1.1 percent, that translates into a projected deficit of $153.56m.

Using Moody’s own figures, which place Bahamian GDP slightly higher, that 1.1 percent is equal to a $168.38m deficit, which places the full-year outcome between $84m and just over $99m higher than the Government’s original projections. And, to even achieve those elevated deficits, the Government will have to run a fiscal surplus of between $232m and close to $250m during the fiscal year’s final five months.

The ‘positive’ Moody’s outlook, and the Government’s own objective of escaping ‘junk’ status with all three credit rating agencies - the other two being Fitch and Standard & Poor’s (S&P) - have coincided with an International Monetary Fund (IMF) study which estimated that the “spreads” on Bahamian external sovereign debt could decline by up to 2.4 percentage points by 2029 if there is a credit rating upgraded (see other article on Page 1B).

‘Spreads’ measure the difference in interest, or the yield, paid on Bahamian government bonds versus what is paid on others, with US Treasuries usually used as the benchmark. The IMF report suggested “sustained and credible efforts” will be required to secure an improvement in The Bahamas’ credit rating, while inclusion in indices such as JP Morgan’s emerging market bond index could also have cut The Bahamas’ spreads.

Moody’s, meanwhile, said the ‘positive’ outlook it has now placed on The Bahamas “reflects the increased likelihood that fiscal consolidation will strengthen The Bahamas’ credit profile over time”. It added that the Davis administration’s efforts over the past two fiscal years, in slashing the fiscal deficit from $722.2m in 2021-2022 to $186.7m in 2023-2024, will more than offset any miss of this year’s target.

“The Ministry of Finance published a mid-year fiscal update in February 2025, which showed a fiscal deficit equal to $398m or 2.6 percent of estimated fiscal year GDP. This compares with the full-year target for a fiscal deficit of 0.5 percent of GDP,” Moody’s said, noting the more than five-fold difference in dollar terms.

“The larger-than-projected deficit was driven by both shortfalls in revenue and higher-than-planned spending, and poses some risks to the Government’s fiscal deficit target for this year. Even if there is some fiscal slippage relative to the target, the fiscal consolidation over the past two years has been sufficient to place debt on a downward trend.”

And, while there was no mention of the uncertainty and blows to business and consumer confidence from the Trump tariff woes, Moody’s added: “There are some risks to the Government’s forecast for revenue growth of 15 percent year-over-year in fiscal 2024-2025. In the first half of the fiscal year, VAT - which accounts for more than 40 percent of total revenue - increased by only 2.6 percent.

“This was offset by very strong growth in taxes on international trade and transactions. Overall, total revenue increased by 10.6 percent year-over-year. On the other hand, we expect the Government to control spending in the second half of the fiscal year to limit the deviation, if any, from the full-year fiscal target.

“Total spending increased nearly 18 percent in the first half of the fiscal year, driven primarily by an increase in capital expenditure. Some of this spending likely reflects delayed capital spending from the previous fiscal year, and we would expect slower growth in capital expenditure through the remainder of the fiscal year.”

Moody’s also gave the Davis administration a further vote of confidence by backing its forecast that it will generate a fiscal surplus in the upcoming 2025-2026 budget year, meaning it will almost certainly be the first time in Bahamian history since independence where annual tax and other revenues exceed spending.

However, while also affirming the extra revenue that the Government hopes to generate from its 15 percent corporate income tax on companies that are part of multinational groups generating 750m euros and above in annual turnover, Moody’s suggested that the 2025-2026 surplus will be much less than the forecast $448.2m. It is instead predicting the surplus will be $30.9m, or 0.2 percent of GDP, more than $400m less.

“Notwithstanding the mixed mid-year fiscal performance, we expect The Bahamas’ fiscal consolidation to continue, with the fiscal balance turning to a surplus in fiscal 2026 along with sizeable primary surpluses above 4 percent of GDP,” Moody’s said.

“In the absence of shocks, this would place debt on a steady downward trend over the remainder of the decade. Beyond the Government’s efforts to improve tax compliance, which have yielded results, the introduction of a 15 percent Qualified Domestic Minimum Top-Up Tax (QDMTT) on large multinational corporations operating in The Bahamas should increase revenue by about 1 percentage point of GDP beginning in fiscal 2026.

“Risks to the fiscal trajectory relate to the country’s exposure to climate-related shocks and the reliance on tourism, which is sensitive to external factors.” As for the tourism outlook, Moody’s said this is heavily tied to the fate of the US economy, which continues to recoil from the uncertainty created by Mr Trump’s tariff policies and whether these will weigh on the cost of living, spending and travel demand.

“The Bahamas’ growth outlook is particularly vulnerable to changes in US growth prospects given its importance as a source market for tourism. Therefore, slower growth in the US economy or a deterioration in consumer sentiment could weigh on demand for travel,” Moody’s said.

“We estimate that real GDP growth moderated to 1.9 percent in 2024, down from 2.6 percent in 2023, and closer to the economy’s long-term potential of around 1.5 percent to 2 percent. In 2024, total visitor arrivals increased by about 16.2 percent compared with the previous year. Stay-over arrivals, which tend to contribute more to the economy, declined by 0.3 percent year over year.

“However, cruise ship arrivals increased by 20.3 percent, driving tourism growth. Tourism is likely to continue to display strong growth projections in 2025, with total visitor arrivals increasing by 7.8 percent in January compared with the year-earlier period. This will be supported by investments made by cruise operators in recent years in private island destinations within the Bahamas,” the credit rating agency continued

“Royal Caribbean, Carnival Corporation and Norwegian Cruise Line have all invested in private island destination since 2019, contributing to a doubling of visitor capacity in 2025 compared with 2019. However, growth in stayover arrivals will face capacity constraints in terms of room availability, specifically in Nassau and Paradise Island, the most popular destinations.”