The Big Idea

The Bahamas | Another strong month

| April 21, 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.

The latest fiscal data from The Bahamas shows another strong month that puts fiscal year 2022-2023 firmly on track for revenues to outpace spending. Revenues still show strength across all sectors while spending has cooled from the fast pace of October and December 2022. Tourism remains the most important catalyst for revenues. But VAT and property taxes are also strong while spending has declined in real terms this year. This gradual fiscal consolidation represents the backbone for lowering liquidity and solvency risks.

The Bahamas fiscal surplus had allowed for a small buildup of liquidity in January and February with continuing primary dependence on financing in local markets.  The Eurobond curve has somewhat steepened under more supportive externals, but levels are still far from the curve normalization reached last February.

The economic deceleration elsewhere across the region is not yet evident in the Bahamas tax revenues. There has been a more relevant contribution from property taxes after efforts to reduce tax evasion. However, the primary drivers are the VAT and tourism taxes. Economic activity still appears resilient after 14.4% of GDP growth in 2022, and the tourist arrivals are still running above 2019 comparable levels.  The 12-month rolling tourist arrivals through February are approaching 8.0 million against 7.2 million in 2019. Finance Secretary Wilson remains optimistic about March revenues while April is typically a month of high seasonal tax collection. There has also been a reversal towards lower spending in January and February after at spike in the fourth quarter of 2022. Spending restraint will have to continue through the pressures from state-owned companies at fiscal year-end in June. This recent performance provides some breathing room and should reassure on reaching the nominal fiscal deficit of $575 million this fiscal year.

The Bahamas remains on a gradual multi-year path to reach fiscal balance. The medium-term fiscal projections rely on an equal consolidation across revenues and spending with some budget flexibility if revenues disappoint. There is no flexibility on the higher debt service; however primary spending in 2022 is still running 3.4% of GDP above 2019 levels. This represents above-trend spending across goods and services, subsidies, social spending and other categories. The fiscal consolidation could revert to spending cutbacks at a mature phase once revenue collection starts to decelerate. This would also coincide with lower social and political pressures after recovering from the repetitive external shocks. The inflationary pressures have already spiked and are now trending lower on the unwind of the global inflationary shock.

The gradual trajectory to reduce macro imbalances will require a persistent credit risk premium, especially against the marginal decline in policy flexibility and sensitivity to external shocks. However, current high yields should benefit from supportive externals that are still far from February levels and the steady trajectory towards fiscal consolidation this year.

Siobhan Morden
siobhan.morden@santander.us
1 (212) 692-2539

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