By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Standard & Poor’s (S&P) has voiced scepticism that the Government will hit its forecast $75.5m Budget surplus for the current fiscal year without enacting further “meaningful fiscal reform”.

The rating agency, in the analysis that accompanied the first sovereign credit rating upgrade The Bahamas has ever enjoyed, predicted that the Government will do no better than “maintain low fiscal deficits” ranging from 1.2-1.3 percent of gross domestic product (GDP) for the next three fiscal years through 2027-2028.

While not identifying what it means by “meaningful fiscal reform”, S&P’s language effectively implies austerity measures such as new and/or increased taxes, spending cuts or a combination of both. The International Monetary Fund (IMF) has suggested similar, but the Davis administration has repeatedly rejected calls for greater austerity and instead focused on generating more rapid economic growth, enhanced revenue compliance and enforcement and attempting to hold public spending at current levels.

“The growing economy has supported reduced fiscal deficits to levels more consistent with those seen before the pandemic, with the reported fiscal deficit for the fiscal year ended June 30, 2024, at 1.3 percent of GDP,” S&P said in its Bahamas assessment, released on Friday.

“This outcome partly owed to improved tax collection - through a dedicated Revenue Enhancement Unit, among other initiatives - and greater compliance with property taxes. We expect the Government will be able to maintain low fiscal deficits, although in our view it will be more challenging to achieve fiscal surpluses, as the Government is forecasting, absent meaningful fiscal reform.”

Based on The Bahamas’ current GDP economic output, S&P is predicting that this nation will consistently run relatively moderate fiscal deficits of around $181.2m to $196.3m for the next several years through 2027-2028. This is in sharp contrast to the $291.4m and $299.6m surpluses that the Davis administration itself is forecasting for 2026-2027 and 2027-2028.

However, Gowon Bowe, Fidelity Bank (Bahamas) chief executive, argued that achieving the Government’s forecast surplus is more a “bonus” rather than a target that must be hit.

“If we achieve a surplus that’s a bonus. It isn’t one that we must achieve a surplus, but if we get closer to that in the eight to ten months that will bode well and support the upgrade that has taken place,” he told Tribune Business.

Still, S&P is forecasting that The Bahamas will beat both earlier predictions and its long-run average with 2025’s full year economic growth set to be 2.1 percent thank to “booming cruise tourism” and foreign direct investment (FDI) related construction projects across the Family Islands. The rating agency, though, projected that from 2026 onwards economic growth will taper-off to a consistent 1.7 percent through 2026.

“Growth will temper in 2026, although over time the successful implementation of comprehensive energy reforms may address some bottlenecks for growth,” S&P added. “We expect the Government will continue to carefully manage its expenditure and focus on tax compliance measures to sustain revenue and maintain small fiscal deficits….

“However, the country remains highly dependent on tourism, and labour constraints weigh on long-term growth. The Bahamas also has a sizable financial sector, and while opportunities exist to foster local fintech (financial technology) and position the country for opportunities in digital assets, we view this as a longer-term goal.”

Shrugging off the potential impact of the upcoming Bahamian general election, S&P added: “We expect policy predictability across administrations with the upcoming 2026 electoral cycle. The sovereign recently faced two large shocks, Hurricane Dorian in 2019 and the COVID-19 pandemic in 2020, which significantly raised government debt and tested the Government's resolve to sustain the nation's finances.

“While the Government has been able to reduce the deficit on the back of the country's economic recovery, it has not introduced material new revenue or significant cost-cutting measures. The country is exposed to environmental risks and has limited fiscal buffers.

“While the Government has demonstrated its commitment to fiscal consolidation since the pandemic and reduced the deficit, we expect that absent meaningful reforms to build buffers, it will remain vulnerable to external shocks like hurricanes.”

Noting that The Bahamas has no personal income tax, and only a 15 percent corporate tax for those entities that are part of multinational groups with an annual turnover above 750m euros, S&P said it does “not expect further changes to its [The Bahamas] fiscal and tax model.

“Added revenue from the Domestic Minimum Top-Up tax, expected to go into effect in fiscal year 2025-2026, may be offset by the announced reduction of the VAT rate to 5 percent from 10 percent on select unprocessed and essential food items to address cost of living pressures,” S&P said.

“Controlling expenditure will be crucial to maintaining low deficits. The Government has limited fiscal space, given a higher share of recurrent expenditure, including around 15 percent of total expenditure on subventions to public entities. Moreover, the Government has had to make payments on the guaranteed debt of state-owned enterprises (SOEs). SOE reform has been historically limited.”

S&P, though, said that the Government’s refinancing risks have “abated” despite needing to rollover 43.6 percent of its total debt that is due to mature in one year or less. It added: “We expect small fiscal deficits and a growing economy will lead to a slow decline in The Bahamas' financing needs as a share of GDP, with the increase in general government net debt averaging 1.3 percent of GDP during 2025-2028.

“The Bahamas has significant short-term debt, with almost 43.6 percent of debt maturing in the next year. We expect this debt will be largely rolled over in the domestic market. Refinancing risks have abated, given the Government's commitment to fiscal discipline, combined with limited private sector lending opportunities.

“Foreign currency-denominated debt accounts for 47.2 percent of total debt. We expect the Government will continue to use commercial and multilateral bank funding, and may issue in external bond markets,” S&P continued.

“Net general government debt is likely to fall to 66.3 percent of GDP by the end of 2025 from 77.8 percent in 2020, while interest payments will remain above 15 percent of revenue for the next three or more years. We net some of the assets held by the country's social security system from our measure of net debt.

“We forecast the external debt of the public and financial sectors, net of usable reserves and financial sector external assets, will be about 42.3 percent of current account receipts in 2025. These figures include the Government's $2.64 bn in external bonds.”

S&P forecast that The Bahamas’ current account deficit may widen in the short-term due to increased imports associated with the ongoing energy reforms. “Based on the large external liabilities of the country's banking sector, the gross external financing needs of the public and financial sectors will average 193.6 percent of current account receipts in 2025- 2028, down from about 519 percent in 2020,” the rating agency said.

“The current account deficit may widen in the short-term due to higher imports associated with investments undertaken because of the energy reform, offsetting some gains in tourism receipts, and as the financial sector's rollover needs remain high. Over the long-term, the reforms could contribute to smaller current account deficits by reducing fuel imports.”

S&P, in upgrading The Bahamas’ sovereign credit rating from ‘B+’ to ‘BB-‘, also assigned a ‘stable’ outlook to this nation to indicate that no reversal of this decision is likely within the next 12-18 months.

“The stable outlook reflects our expectation that GDP growth prospects will remain solid and that long-term growth will align with that of peers at the same level of development. We also assume the Government will remain committed to prudent fiscal management and contain the debt burden,” S&P said.

“We could lower the ratings over the next 12-18 months if the Bahamas' growth trajectory faces unexpected and significant setbacks or if the Government reverses the progress it has made on fiscal adjustment, leading to large fiscal deficits. We could also lower the ratings if the sovereign's access to external liquidity were to deteriorate unexpectedly.

“We could raise the ratings in the next 12-18 months if The Bahamas continues to demonstrate solid growth and sustained near-balanced fiscal outcomes. This could result from stronger revenue supported by, among other things, the successful implementation of a new corporate income tax and policies and initiatives that accelerate state-owned enterprise (SOE) reform.”

The Government, responding to S&P’s action, said: “This ratings upgrade from S&P reflects the ongoing recovery of credit perception and marks a significant milestone in The Bahamas’ re-rating trajectory, building upon positive ratings actions from Moody’s (outlook revision to ‘positive’ from ‘stable’) and Fitch (‘BB-’ / ‘stable’ inaugural credit rating), both of which were published in April, and the country’s successful return to international capital markets in June. It further demonstrates the authorities’ commitment to improved market disclosure and financial transparency.”

One financial source, speaking on condition of anonymity, said: “This is an accomplishment. You can’t knock that. This helps us from a financing standpoint. That’s critical. It’s now for the Government to make use of their fortune.

“They have to decide if they will continue with fiscal consolidation because it will help to lessen the burden of refinancing debt. We’re still non-investment grade. The consolidation has to continue to get back to investment grade. It’s still not where we need to get to. We only got knocked down because of the pandemic.”