New Bahamas government facing debt crisis

Photo by Georgy Trofimov

A looming debt crisis and another sovereign credit rating downgrade are just two of the many challenges facing the newly elected Philip Davis Administration.

Prime Minister Davis led the Progressive Liberal Party (PLP) to a resounding victory in the 16 September election, securing 32 seats to the Free National Movement’s (FNM) seven.  

“It is time to face our challenges and face them head on, you voted for a new day, a new beginning.” Davis said during his victory speech.

In the days after the election, nine cabinet ministers were sworn in, as well as Davis’ selections for parliamentary secretaries. Among them, Ryan Pinder as Attorney General and Minister of Legal Affairs, Fred Mitchell as Minister of Foreign Affairs and Public Services, Dr Michael Darville as Health Minister, and Michael Halkitis as Minister of Economic Affairs.

The Prime Minister and his Cabinet face myriad challenges including a turbulent period of mounting debt, double-digit unemployment numbers, stagnant economic growth, low vaccination rates, and a recent credit rating downgrade. 

One day after Davis was elected, international credit ratings agency Moody’s announced that it was downgrading the country’s long-term issuer and senior unsecured ratings to ‘Ba3’ from ‘Ba2’. This latest downgrade takes The Bahamas even deeper into non-investment grade or “junk” status.

In its release, Moody’s highlighted that the country’s US$10.356bn national debt is now more than six times bigger than the government’s annual income or revenue base. Moreover, the ratings agency made clear its negative outlook on The Bahamas, which signals there could be another downgrade in the offing. 

Justifying the negative outlook, Moody’s said that the pace of the economic recovery, and particularly tourism activity, would directly affect the pace of fiscal consolidation and how quickly debt begins to decline. “The reliance on indirect taxation – VAT and excise taxes – makes government tax collection more sensitive to the speed of the economic recovery,” the release added.

“A slower recovery would place downward pressure on revenue and limit the speed of fiscal consolidation and prospects for debt stabilisation. Larger-than-expected fiscal deficits in turn would increase reliance on external market borrowing and could create external liquidity pressure,” Moody’s said.

Responding to news of the downgrade, Prime Minister Davis said that it was not surprising. “If anyone has been following the fiscal affairs of this country, they’d know that for quite a while we’ve been heading over a fiscal cliff,” he added.

This revelation from Moody’s puts the new government’s pledge to cut the VAT rate from 12% to 10% on potentially shaky ground. When asked how soon Bahamians could see his party’s election promise to reduce the VAT rate, Prime Minister Davis declared that announcement would be made in the coming weeks. 

However, Executive Director of the Organisation for Responsible Governance, Matt Aubry, has cautioned that such a cut would “not hold the line with Moody’s and other rating agencies” that are watching very carefully to see how the new government tackles The Bahamas’ fiscal, economic, and COVID-19 crises.

Aubry said that the PLP’s election promise would be complicated by the downgrade since the country’s dire fiscal circumstances reduces the Government’s space for a VAT cut, as any revenue foregone would need to be “offset” by gains in other areas that have yet to be identified.

Before the election, now-Prime Minister Davis argued that the VAT decrease will help hard-hit families and businesses while stimulating the economy by incentivising more consumer spending and a higher transaction count. The previous government estimated that the one-year rate cut would cost the country US$100mn in tax revenue. 

While all Bahamian businesses and consumers await even a temporary rate reduction, the ballooning national debt and projected US$951.3mn fiscal deficit mean that the Davis Administration faces increasing pressure from rating agencies, multilateral institutions, lenders, and creditors to produce a detailed debt management plan to improve the sustainability of public finances.

To this end, Gowon Bowe, CEO of Fidelity Bank (Bahamas), has argued that the Government should instead focus on eliminating the VAT exemptions introduced by the former Minnis administration, so as to return The Bahamas to the “broad-based” taxation model it was initially praised for.

Meanwhile, noted Caribbean economist, Marla Dukharan, has warned that The Bahamas is one of two Caribbean countries expected to be the next to default on their sovereign debt. Speaking at a recent University of the West Indies roundtable on Caribbean economies, Dukharan said that the estimated US$3.4bn economic devastation caused by Hurricane Dorian in September 2019 has cast a long shadow over the country. 

Dukharan argued that the economic fall-out of the COVID-19 pandemic has dealt the nation a double-blow that would likely necessitate significant restructuring through an IMF agreement in the near term.

With the government expected to attempt to raise funds through debt financing later this year, there is an added worry that the latest credit downgrade and negative economic projections could increase the government’s borrowing costs as creditors increase their risk premiums. An estimated US$512mn is budgeted for debt servicing costs this fiscal year, accounting for 18% of budgeted recurrent expenditure.

This is a lead article from Caribbean Insight, The Caribbean Council’s flagship fortnightly publication. From The Bahamas to French Guiana, each edition consists of country-by-country analysis of the leading news stories of consequence, distilling business and political developments across the Caribbean into a single must-read publication. Please follow the links on the right-hand side of this page to subscribe, or access a free trial.