The Big Idea
The Bahamas | Successful target
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. This material does not constitute research.
The full picture of the Bahamas fiscal situation for the last year is finally in, and it is solidly in the target range. This not only helps establish a track record of fiscal discipline for the country but also shows a meaningful drop in deficit from nearly 4% of GDP in FY2022/23 to 1.2% in FY2023/24. Chalk it up to aggressive tax collection and significant spending restraint, especially in June. The progress should support the current yields of around 9% on the sovereign debt and stabilize potential carry if not slightly pulling spreads lower.
The last two months of fiscal data through June now complete the full year FY2023/24. This represents an important inflection point on what remains a lengthy trajectory towards reducing debt from 80% of GDP towards 50% of GDP. There is no room for error for the gradual trajectory of first shifting the fiscal deficit into surplus and then slowly lowering the debt burden. This past fiscal year was even more relevant after having revised the deficit target higher from 0.9% of GDP towards 1% to 1.5% of GDP after a series of target revisions. The final deficit of 1.2% of GDP did not deviate too much from the original target of 0.9% of GDP and establishes an important track record.
The last two months broke precedent with a $26 million surplus in May and a small deficit of $35 million in June. This contrasts to the seasonally high spending near year-end that typically produces a deficit closer to $200 million. Revenue continues to benefit from aggressive efforts to reduce evasion on property taxes and strong tourism revenues. The spending also sharply decelerated across capex and wages in May and June. These last two months pushed the 12-month rolling primary surplus much higher and the nominal fiscal deficit much lower. Year-end spending restraint was necessary, but local headlines question whether payments are deferred as opposed to permanent cuts. There was an under-execution of goods/services at 89% of the budget as well as capex at 83% of the budget. There is no room for back-tracking on the spending restraint but also no further flexibility for more cutbacks.
There has been a collapse in spending from 24.7% of GDP in FY2022/23 to 21.7% of GDP in FY2023/24. There is no obvious flexibility for further spending cutbacks with all sectors either at or below pre-pandemic levels except for debt service. The next efforts need to rely upon higher revenues.
The revenue collection has been impressive; however total revenues at 20.5% of GDP are still far from the 25%-of-GDP targeted ratio. There has been an impressive surge in property taxes as well as taxes on international trade. The outlier disappointment is VAT with fiscal year revenues at 9% of GDP far below official estimates of 10.6% of GDP and 85% of targeted revenues. There is obvious room for improvement on more efficient tax collection from the “fully resourced Revenue Enhancement Unit” with technology for cross-referencing claims and referral of accounts to private debt collectors. The more obvious gains would come from the approval of a 15% corporate income tax on multinationals. The plans are for approval this year and potential 1%-of-GDP in revenues in 2025. This would easily push the fiscal accounts into balance with the 2%-of-GDP fiscal surplus then dependent upon higher VAT revenues.
Assuming no back-slipping on spending, then it should be fairly easy to meet the 0.5% of GDP fiscal deficit for FY2024/25. The challenge is how to shift into a much larger surplus of 2.8% of GDP in FY2025/26. This is the trend fiscal target necessary to sharply reduce debt levels from 80% of GDP closer to 50% of GDP and transform ‘B’ credit ratings back to the ‘BB’ category. The efforts will have to shift to higher VAT collection or broader application of the corporate income tax (beyond multinationals). It is this second phase that would allow for a further compression of yields towards 7% yields of ‘BB’ credits dependent upon consistent fiscal surpluses that gradually reduce the debt ratios. The important progress through FY2023/24 should anchor the current yields at around 9% with prospects for lower beta/high carry returns that have allowed for YTD outperformance at 11% and one of the top performing emerging markets credits. The approval of corporate tax reform later this year may invite a positive outlook from either S&P or Moody’s but with an upgrade to ‘BB’ rating category requiring a shift on the cashflow into fiscal surplus.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
