The Big Idea
The Bahamas | Strong tourism
Siobhan Morden | March 10, 2023
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Recovery in tourism remains the backbone for economic growth and fiscal consolidation in The Bahamas. This January capped almost a tripling of year-over-year tourist arrivals with a 12-month rolling tally of 7.5 million. The departure tax through the first half of fiscal year 2022-2023 is already at 74% of the budget. This strength should reinforce the carry returns on The Bahamas debt and anchor normalization of its Eurobond curve. But spending needs to decelerate in the second half of the fiscal year to comply with the annual budget deficit and to remain on a trajectory to surplus in fiscal year 2024-2025.
Tourism started the year strong with almost 1 million visitors in January. This builds on a remarkable recovery from 2.1 million tourists in 2021 to 7.0 million in 2022. The Bahamas central bank has noted a rebound in “high value-added air segment and the rebound in sea traffic.” This jumpstart makes the official 20% growth target for tourist arrivals seem conservative for 2023. The visitor arrivals now far exceed 2019 levels. Growth will depend on easing of prior bottlenecks including more frequent flights from the US and further foreign direct investment in the tourism sector. There is still spare capacity with the hotel occupancy rates increasing from 47.9% in January 2022 to 55.7% in January 2023.
The release of fiscal results from the first half of the year reaffirms the importance of strong economic momentum. The results address the frequent criticism that revenue collection and growth projections are optimistic. Revenue forecasts are expected to increase from 22.8% of GDP in fiscal year 2023-2024 to 24.4% of GDP in fiscal year 2024-2025, mostly assuming higher tax compliance. The release of fiscal data from the second half of 2022 does not reveal much new after having already released monthly data through December 2022. It’s also more insightful to reference the higher frequency data but with some further explanation on the underlying trends from the budget reports.
The revenue collection remains quite robust at 12% year-over-year increase in the fourth quarter of 2022. The 7% year-over-year deceleration in VAT collection has been offset with 40% year-over-year taxes on international trade in the fourth quarter of 2022 and a growing proportion of overall tax revenue. The latest data may also show the “best property tax compliance rates not seen in many years” but property taxes remain a low 7% level of overall tax revenues in 2022. This has not been sufficient to compensate against the 26%y/y increase in overall spending in the fourth quarter of 2022 with the overall deficit increasing from $145 million in the fourth quarter of 2021 to $254 million in the fourth quarter of 2022. The government continues to unwind the Covid-related spending on subsidies and social assistance; however, all the other categories are higher including wages and debt service.
There is no immediate threat to the fiscal year 2022-2023 targets on still six months remaining and the July-December 2022 deficit of $281 million at 49% of the full year budgeted deficit of $564 million. There are also not the same concerns about financing flexibility after the normalization of the Eurobond curve. This should improve near-term rollover/liquidity risks. However, the current pace of spending is not sustainable and there isn’t much flexibility against any shocks or budget seasonality. The next few months of data needs to reaffirm a faster slowdown on spending to reassure full year budget compliance. The medium-term fiscal projections rely upon higher trend revenues; however, the fiscal year 2022-2023 adjustment depends on lower spending.
The Bahamas is still heading in the right direction but it’s a slow fix on reverting the fiscal deficit to surplus (fiscal year 2024-2025) and slowly working down the debt ratios (fiscal year 2030-2031). There has been a huge credibility boost on policy management as well as virtuous circle of lower yields and lower liquidity risks. However, the current yield is now much lower versus peers while the economy remains still vulnerable to external risks. The tighter spreads, after impressive gains from November 2022-February 2023, and only slow fiscal consolidation exposes vulnerability to external shocks and latent risks of a US recession. The Bahamas is not likely to relapse into crisis and should be more resilient to a US economic slowdown, but the risk-reward profile is no longer as compelling after the full curve normalization and the resurgence of volatility in external markets. The less favorable risk/reward was the tactical reason for us shifting from an overweight to a neutral recommendation last month. The timing was opportune on the less impressive month-to-date (EMUSTRUU) performance with normalized spreads more vulnerable to market beta and total returns reversing into negative territory after four consecutive months of positive returns.