The Big Idea
The Bahamas | Fiscal consolidation
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An early preview of the fiscal picture for the Bahamas suggests things are improving faster than expected. This should anchor investor sentiment ahead of the typical reassessment before hurricane season. Moody’s recently has echoed expectations coming out of the country’s recent IMF meetings for stronger tax collection in 2024. That shifts the fiscal picture closer to target for FY2023/24. This should help Bahamas debt, which have delivered stable carry returns this year and welcome diversification from US Treasury weakness and losses elsewhere across most of emerging markets.
The economic data through fiscal 2023 has not been encouraging. The Bahamas saw a more pronounced economic slowdown and no noticeable reduction in fiscal deficit near 3.5% of GDP. Mid-year budget performance shows a deficit at nearly double the full-year target. This may reflect the mature stage of the cyclical post-pandemic recovery.
The economic team is now confronting a crossroads on their ambitious fiscal target. This is when the strength of institutions matter. Interestingly, Moody’s puts the country’s institutional strength at an investment grade level of ‘Baa2.’ This would imply important checks and balances that reinforce fiscal targets even at a more difficult phase. It’s notable that the IMF projects some improvement in the deficit this fiscal year to 2.6% of GDP while Moody’s is even more optimistic on near completion of the 0.9%-of-GDP official target. The fiscal data may start to improve in 2024 with more active efforts to raise revenue collection.
The country is pushing for more efficient tax collection and lower tax evasion. This is why the IMF and Moody’s both project an improvement in the fiscal deficit for the second half of the fiscal year that would reduce the annualized deficit near 3.5% of GDP to 2.6% of GDP and 1.2% of GDP In 2024. The Moody’s view:
“Even though the deficit exceeded the target for the first six months of the fiscal year, there were signs of fiscal consolidation. We expect improvement in revenue collection and continued restraint on spending will allow the government to come close to the annual target of 0.9% of GDP. We forecast a slightly larger deficit in fiscal 2024 — 1.2% of GDP — reflecting moderate slippage vis-à-vis the government’s fiscal targets.”
This is a serious vote of confidence from Moody’s and a potential positive shock if the fiscal deficit targets come back on track.
The adjustment should focus on the undershooting of revenues at only 39.2% of target in the first half of FY2023/24. The initial priority is lowering tax evasion on property taxes, with an officially estimated $800 million in arrears on commercial and foreign property. The last resort alternative to auctioning off these tax-delinquent properties beginning in February should allow for a resurgence in property taxes in the first half of 2024. Banks are also cooperating as an intermediary. This should improve on the low 24% of the budgeted property tax collection through the second half of 2023. The government targets around $20 million to $50 million a year from the sale of tax delinquent properties. The higher departure tax should also provide some residual revenues for international trade transactions to get closer to budget. This alone would bring the fiscal deficit to around 2.5% of GDP, closer aligned with IMF forecast. The newly installed special task force could start to reduce tax evasion by cross-referencing information across other agencies. The initial estimates are maybe another 2% of GDP in cumulative revenues on the benefits of tax compliance over the next few years. This alone should bias the IMF deficit forecast lower.
The Bahamas should be motivated to release 2024 fiscal data ahead of the debate on the FY2024/25 budget this month.The backward data for 2023 doesn’t yet show the trend shift with the release of the monthly fiscal data now delayed for maybe three months. The midyear budget review has already discussed the prospects for a 15% corporate tax rate for the next year’s budget. This should become a louder debate this month with initial consultations with multinationals and majority legislative control necessary for approval. The initial proposal seems targeted to only multinationals (revenues at 1% of GDP) with broader application depending on whether or not tax collection improves throughout this year.
There is still probably need for proactive fiscal adjustment on what remains an ambitious target of shifting from 1%-of-GDP deficit in FY2023/24 to a 1.5%- to 2%-of-GDP fiscal surplus in FY2024/25. If there is a faster reduction in this fiscal year’s target, then this would provide much needed credibility that would not only anchor credit spreads but argue for normalized yields closer to 9% from current levels of 10%.
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