DNA Responds to Moody Rating
FOR IMMEDIATE RELEASE
4 September 2011
Our financial sector and the greater Bahamas received some disappointing news last week, as many learned that a highly-respected, national financial advisor, Moody has confirmed what we already feared—The Bahamas’ economy is doomed to struggle long after this administration’s term ends. These implications have adverse affects on our sustainability and progression into first-world nation status.
Moody’s has maintained The Bahamas’ current bond credit rating [AA3], but has revised its outlook on the economy of The Bahamas from stable to negative. The reasons pertain to the rapid increase in government debt, the limited potential for growth and the challenges the Government faces in increasing revenue [taxes]. As a result, Moody’s questions the Government’s ability to reduce its debt in the near-medium future.
Moody’s is totally justified in changing its economic outlook and indeed, the real question is why has it not already downgraded The Bahamas’ credit rating as S & P did to BBB+ in 2008. Heretofore, rating agencies have complemented successive Bahamian governments on their fiscal prudence and, because they have, until recently, been able to maintain the country’s debt—GDP ratio at a level lower than 40 percent. The numbers, however, would indicate that instead of demonstrating fiscal prudence, successive Bahamian governments have been guilty of deficit spending. This has been the norm, as there has been only one year, since our country’s Independence that a Bahamian government has had a balanced budget.
There is a belief held by the IMF and the rating agencies that the fiscal affairs of a country are in good order, as long as the debt—GDP ratio remains below 40 percent. This belief is not only unfounded, but also misleading, because at the end of the day each country’s ability to service its debt depends not on the absolute level of debt, but the Government’s ability to service the debt, based on its revenue generating abilities.
The Bahamas has now entered a very dangerous economic zone, often referred to as the “downward spiral of debt.” That is to say, the more debt a country takes on, the more costly the debt becomes, and the less money there is to pay off the debt or indeed, that there is available for capital expenditures.
It is these capital expenditures that are needed by the Government for the improvement and maintenance of the country’s infrastructure (physical, health, education, institutional, technological and capital). This is exactly the position that The Bahamas finds itself in today—massive debt, in need of $2 billion worth of infrastructural development and insufficient funds with which to do the work.
Moody’s are also absolutely correct in their opinion that the Bahamian economy has limited upside potential. The reason for this is that the Bahamian economy has been mismanaged for a very long time and now it’s in a state where it can be described as false, faulty, fruitless and futureless.
It is false, because of the lack of Bahamian ownership of the key economic sectors, faulty because of the many structural defects, and its undiversified nature. It is fruitless, because it lacks productive capacity and futureless, because in its current format it is not sustainable.
Thirdly, Moody’s is right on the mark with regard to the Government’s severe challenge to being able to raise revenues by increasing taxes. In a good year, the Government collects about $1.5 billion in revenue; this appears to be the upper limit of the Government’s revenue collecting capacity given the current structure of the Bahamian economy.
Due to the global recession, particularly in the U.S., and the fact that 60 percent of our GDP is dependent on tourism, it is unlikely that there will be an increases in revenue in the near to mid-term of the next administration. The failure to significantly increase government revenue through the increased taxes associated with the last mid-term budget clearly demonstrated to the Government how difficult it is to increase revenue by increasing taxes during a recession.
Furthermore, the fiscal stimulus programs recently initiated by the Government have had no significant impact on unemployment. Likewise, the private sector is still not confident of the short to mid-term future of the local or global economy and thus consumers are not spending and investors not investing. The Governments’ only option is to decrease spending in a way that does not impact the economy until revenues begin to pick up. So far, there have been no signs of this, but this should not come as a big surprise as all of our Governments have become experts in deficit spending.
Once the DNA is elected as the next Government of The Bahamas, immediate steps will be taken to implement its short, medium and long term plan to balance the budget and reduce the national debt. There is a tremendous amount of fat and slack in the system based on a combination of poor management, corruption and political patronage; this will be eliminated. The end goal is to reduce the national debt and increase our sovereign credit rating, which will lower the country’s borrowing cost and make the country more attractive to potential investors. This will also free up more money, which will facilitate infrastructural development and thus our GDP.
As well, a carefully crafted economic plan will be operationalized to focus on lowering the cost of living for all Bahamians. “Bahamianization” of the economy, increasing the revenues derived from the tourism and banking sectors and significantly diversifying the economy to provide food, energy and land security for all Bahamians. Nevertheless, we must branch from our bread and butter tourism and banking industries to expand other avenues of revenue collection and direct investment. This is not a pipe dream, but a chance for all Bahamians to truly live the Bahamian Dream, instead of the present nightmare, that has been brought on by the inept and poor fiscal management of successive governments.
The DNA will expand more on its economic proposed policies at a town hall meeting that will also address job creation on September 28 at 7 pm at a venue to be announced. This will mark the fourth of a series of town hall meetings held by the Party to address national issues. The first town hall meeting was on Crime and The Fear of Crime, the second focused on immigration and the third, which is on September 14 at the BCPOU Hall at 7 pm, will address education in The Bahamas. The video broadcast of the previous meetings can be viewed on the DNA’s website, www.mydnaparty.org, as well as other media.