Although crediting The Bahamas’ macroeconomic stability, prudent fiscal policies and steady monetary stance, a highly respected credit ratings agency has sounded a warning.
The warning came in Standard & Poor’s Ratings Services latest evaluation which affirmed The Bahamas’ ‘A-‘ long- and ‘A-2’ short-term sovereign credit ratings.
Analysts pointed out that ongoing and pending tourism investment and the strong performance of the financial sector create a solid base for the Bahamian economy and future growth. However, they said the risk is fiscal relaxation stemming from the government’s sharing the cost of envisaged private-sector-led investments are balanced with the expected positive long-term impact of these projects.
Standard & Poor’s assessment made particular note of the country’s fixed exchange-rate regime, in effect since 1973, which ensures low inflation, while generally prudent fiscal management has led to only moderate accumulation of government debt (estimated at 24% of GDP on a net basis in 2006, compared to 20% for the ‘A’ median).
“The ratings also reflect the island’s politically stable environment and high standard of living (compared to its peers), as well as the public sector’s low and declining external debt,” said analyst Olga Kalinina.
“At the same time, the ratings remain constrained by The Bahamas’ limited fiscal flexibility, vulnerabilities inherent in its small and open economy, and high external current account deficit, which puts pressure on the country’s external liquidity position,” she added.
Standard & Poor’s said that the stable outlook balances recent positive trends in the tourism and financial sectors with the lack of progress in structural reform, particularly tax reform and privatization.
According to the agency, the outlook on the long-term ratings remains stable, with indications that this could be changed to “positive”. Specifically, analysts pointed out that should the government manage to contain fiscal pressures and foreign direct investment remains high, buffering the central bank’s international reserve position from widening current account deficits, “a positive outlook will be considered.”
The Minister of State in the Ministry of Finance James Smith had explained earlier this year the government did not expect the national debt to come down significantly – if at all – over the next year. Minister Smith said there’s good reason for that.
There is still a need for a tremendous amount of government capital expenditure or investments in improving infrastructure, doing a lot of maintenance work and also preparing The Bahamas for other large investments, he explained.
In order to accommodate billions of dollars in investments pouring into The Bahamas, he indicated that the government is challenged to upgrade Nassau International Airport and make other infrastructure improvements.
The latest report from the Central Bank of The Bahamas for January 2006 was that government’s deficit for the first six months of fiscal year 2005 / 2006 narrowed by 15 percent to $71.3 million over the comparative fiscal year 2004 / 2005 period.
It said buoyant economic conditions, combined with enhancements to revenue administration, led to a $79.8 million boost in revenue intake to $544.9 million. Tax receipts, which comprised 92.2 percent of the total, rose by 13.2 percent, the report said.
According to the Central Bank’s report, total government expenditure also increased in the first half of the current fiscal year, growing by 12.2 percent to $616.1 million.
The Central Bank projected that favourable domestic conditions supported by international developments should help to maintain the growth recorded in January.
“The forecast for the economy remains positive for 2006, with anticipated increases in tourism-related foreign investments combined with sustained construction activity providing the main stimulus for economic growth,” the report noted.
The Bahama Journal
