Moody’s not optimistic as Bahamian government unveils multi-million dollar budget

US-based rating agency Moody’s said the Bahamian government’s fiscal consolidation projections face multiple risks due to the absence of any tax increases in the national budget by several years. million that was unveiled in Parliament on Wednesday.

Prime Minister Phillip Davis presented a multimillion-dollar tax-free budget to Parliament as the country begins to recover from the impact of the coronavirus (COVID-19) pandemic and now faces “de great challenges and opportunities”, occasioned by a changing global environment.

Davis told lawmakers that “this is a time of great challenges for our country, but also a time of great opportunity.”

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According to Davis, the budget forecasts a “significant rebound in the Bahamian economy” and total revenue is estimated at US$2,804.4 million, a 19.9% ​​increase over last fiscal year “when the economy was in the early stages of an economic recovery. rebound from the COVID-19 pandemic.

He said that regarding expenditure, his administration intends to spend $3,368.4 million with recurrent expenditure projected at $2,997.2 million and capital expenditure estimated at $371.1. millions of dollars.

He said that as a result of these operations, which incorporate the principles of total budget management, the budget deficit under the current budget is estimated at $564.3 million.

Moody’s said that while the reduction in the budget deficit was reported as a positive “credit” for the Bahamas, it noted “overly optimistic revenue projections” in the absence of a broader tax base and difficulties in controlling taxes. public expenditure “in accordance with objectives”.

He warned this posed real threats to bringing the US$10.5 billion national debt under control, suggesting the government that came to power in September last year may have underestimated its servicing costs in debt (interest) due to a combination of the global rise as developed countries struggle with inflation and the “rising risk premium” for Bahamian sovereign debt.

Moody’s said the government’s plans to restrain recurring spending over the next three fiscal years, with slight cuts planned for 2023-24 and 2024-25 from the next 12 months, could limit the economic growth on which it is slated. support to improve the post-COVID-19 period situation.

“The main risks to the budget are overly optimistic revenue collection projections in the absence of concrete steps to broaden the tax base, and the inability to manage spending in line with targets,” Moody’s analysts said in an investor credit note.

“Specifically, the government plans to keep recurrent primary spending unchanged over the next two fiscal years, which would reduce real spending given nominal growth by 15% over the same period. In addition, the government’s assumptions regarding interest expenditure imply a decline in the average cost of debt despite a rising global interest rate environment.

The budget was presented under the theme “The way forward: A plan for recovery and progress” and Prime Minister Davis told lawmakers that it “provides a foundation to strengthen our nation, to lift us up, to face the future with strength and optimism.”

“This budget provides support for the here and now and also charts a course for a better future,” he added.

Moody’s noted that without tax increases, the government expects recurring revenue to reach 24% of gross domestic product by the end of fiscal 2025, 4.4 percentage points higher than fiscal 2022 and 5, 4 percentage points more than in fiscal year 2019.

“As we noted earlier, the government’s revenue assumptions could turn out to be overly optimistic, leading to a more gradual fiscal adjustment.”

Moody’s said the government also estimates its debt servicing costs will peak at US$589 million in 2022-23, before declining in subsequent years.

“Budget projections suggest that interest payments will peak in fiscal year 2023 at 21% of revenue,” he said, adding “given that funding requirements and liquidity risk will be high in Over the next two years, with gross financing needs averaging more than 20% of GDP in FY 2023-24, an increase in borrowing costs would increase interest expenditure and lead to a larger fiscal deficit .

“Given rising interest rates around the world and the rising risk premium for Bahamian government debt, even assuming an unchanged average cost of debt, this would imply interest expense. higher than government plans,” Moody’s added.

CMC/

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