The Big Idea
The Bahamas | Fiscal performance
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The Bahamas recently released fiscal results through December 2022 showing a slowdown in fiscal consolidation. Falling revenues will likely require a cutback in spending. But the underlying trend still points toward meeting fiscal targets for 2022-2023, especially with revenues from a record 7 million tourists last year. Government financing still depends mostly on local borrowing with occasional US dollar bank loans and bonds. Normalizing bond yields imply lower liquidity risks. Still, the best position at current valuations looks neutral.
The fast-paced fiscal consolidation in the first half of 2022 decelerated in the second half. This mostly reflects the deceleration from what was previously 25% year-over-year revenue collection on the impressive VAT revenues at 36% year-over-year in the first half of 2022. The deceleration in VAT revenues is partly compensated from still high taxes on international trade and transactions. This reflects the still strong tourism revenues with visitors recovering to record level of 7 million last year.
There has been a worrisome uptick in spending that shifted the primary surplus back to deficit on a 12-month rolling basis. The spending was mostly concentrated in December with seasonality the likely culprit; however, the higher fourth quarter spending will need to quickly reverse to realign with FY2022/23 targets. The spending shifted from a real contraction to a real expansion in the second half of the year with a recovery in capex and current spending.
The high debt service at 4.2% of GDP and equally low capex at 2.3% of GDP in 2022 shows a more difficult phase of budgetary stress. There is budget flexibility to cutback other areas that are still higher in 2022 post Covid compared to 2019 pre Covid levels including wages, goods and service, subsidies, social benefits, and other payments. However, these categories are all socially quite sensitive on still high unemployment and a persistent inflationary shock. This year will be critical on whether there is political commitment to cut spending with the medium-term fiscal program relying on a reduction from 26.8% of GDP in FY2021/22 to 25.4% of GDP in FY2022/23.
The financing alternatives show continuing high dependence on local markets (central bank and bonds) with the occasional one-off inflow from external sources. The external financing is a reminder that small countries with small gross financing needs benefit from greater flexibility since small amounts (such as the recent IMF SDR of $232 million) goes a long way on tackling the $1.7 billion gross financing needs in FY2022/23. This financing flexibility should only improve after the normalization in credit spreads with near full recovery back to 2021 levels. There are no near-term plans for Eurobond issuance with high debt service of 4.2% of GDP probably encouraging cheaper funding from multilaterals.
The Bahamas still offers attractive high yields with stronger fundamentals and effective management relative to ‘B’ rated peers. The off-index status is also a technical advantage against the high beta status of comparables like Argentina and Ecuador. The curve normalization may also invite ESG-related debt liability management that targets the 2024 maturity and further reduces liquidity/rollover risks. Despite these stable technicals and fundamentals, I had recently reduced an undervalued recommendation back to neutral on the conservative strategy to take profits after the impressive gains from November 2022 through February 2023. The tighter spreads and only slow fiscal consolidation still exposes vulnerability to external shocks and latent risks of a US recession.
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