The Big Idea

The Bahamas | Missed target

| February 9, 2024

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.

Only five months into the Bahamas fiscal year, the $185 million cumulative deficit has already blown through the $131 million full year target. But that doesn’t mean things can’t improve. Total revenues in November were robust while spending was flat. And the International Monetary Funds’ Article IV report kicks off debate about adjustments needed for fiscal balance and debt sustainability. Financing needs seem manageable in the near term with low rollover risks and no upfront Eurobond amortizations. This has supported the Bahamas stealth 2% outperformance in January. But it will probably require more substantial fiscal progress to push yields to normalized levels.

The monthly fiscal data points to an annualized fiscal deficit of $533 million or around 4% of GDP through November 2023. There was a pickup in VAT revenues and continuing strong taxes on international trade. The uptick in revenues came with a deceleration in spending that was flat year-over-year.  There hasn’t (yet) been a more pronounced shift that would suggest significant improvement on the deficit. Hitting the ambitious target this fiscal year would require monthly surplus for the remainder of the year. This is not unrealistic during the months of high seasonal tourism and potential for some additional tax revenues. Fiscal performance from December 2022 through April 2023 posted only a small cumulative deficit. However, the challenge always is managing the spike in fiscal year end spending in June that produces large monthly deficits of $200 million to $300 million.

The stubborn deficits do not pose a funding challenge in the near term due to creative sources of external funds and no near-term amortizations. The Bahamas still rely on local monthly funding. However, issuance backed by the International Development Bank provides some breathing room for the FY2023/24 budget. This should sustain the country’s relatively stable returns and high carry.  However, it is hard to expect normalization with high 10% Eurobond yields and no clear path to the fiscal balance needed to lower debt balances below 80% of GDP.

The release of the IMF Article IV has invited debate about fiscal targets and reforms. The IMF fiscal recommendations include a personal income tax on the highest income brackets, an OECD 15% minimum global income tax, a higher property tax for higher value properties and SOE spending restraint. This would allow for further consolidation necessary for reaching fiscal targets with lower debt and borrowing costs that would provide additional buffers to immunize the economy against external shocks. The IMF projects that additional revenues of 3.7% of GDP are necessary to accommodate additional social/capex spending while also eliminate the fiscal deficit. “Tax and expenditure reforms (SOEs) would improve the progressivity of the fiscal system and reinforce debt sustainability (to around 50% of GDP by FY2032/33). These IMF recommendations echo the market skepticism on how to reach fiscal revenues at 25% of GDP without tax reform. The underlying trends through FY2022/23 were not encouraging with revenues stalling at 21% of GDP and still high structural spending on higher debt service.

The official forecasts rely mostly on efficiency gains with some additional revenues from new tourism taxes (“deficit target of 0.9 percent of GDP for 2023/24 is attainable with existing taxes, improved compliance in VAT and property taxes”). The authority response within the Article IV reaffirm commitment to their fiscal targets with a “strategic review of the tax framework in 2024” and perhaps inviting more public debate about corporate tax reform. The next few months will be critical on whether authorities revise targets or revamp their strategy. The uncertainty about the medium-term fiscal consolidation should imply still high yields until there is conviction about the commitment and path towards debt sustainability and lower vulnerability to external shocks.

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

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