Wall Street eyes PLP's next move
By Jeffrey Todd
Guardian Business Editor
NASSAU Wall Street is watching the new government's fiscal direction closely, as it affirms the country's stable long-term foreign currency rating.
In a report by Standard & Poor's (S&P), The Bahamas' outlook remains at "BBB" and its short-term foreign currency sovereign credit rating rose to "A-2" from "A-3." The promising news comes less than a year since S&P downgraded the country's long-term credit rating from "BBB+" to "BBB" after revising the way it evaluates sovereign ratings.
The new system places heavier weight on economic diversity and growth prospects.
Richard Francis, a senior analyst at S&P, said a "major focus" will be the first moves made by the Progressive Liberal Party (PLP) to steer the economy towards recovery.
"There has been some downward pressure and a higher debt burden in The Bahamas, coupled with the relatively weak economy," Francis said from his office in New York. "What we are focusing on right now is the government's fiscal outturn and how that will look in terms of reducing the deficit over the next few years. That is the major focus we are having."
The analyst noted that The Bahamas, and indeed the entire region, has experienced a "mild rebound" in its coveted tourism industry. Nevertheless, Francis told Guardian Business that this reliance on tourism "does limit economic prospects."
He noted that incorporating a new tax regime could be a major boost in terms of diversifying revenue. Since the PLP came to power, introducing tax reform, such as a value-added tax, has remained a strong point of discussion.
"VAT would certainly be a positive on the revenue side," Francis added. "VAT seems to be the best and easiest tax for Caribbean countries. It can be more easily monitored and quite efficient."
Michael Halkitis, the state minister of finance, said Wall Street's decision to affirm the stable rating is encouraging. The view of the new government, he said, is to ensure the situation doesn't get any worse.
The first order of business is to get the economy stabilized and reduce the deficit, the minister told Guardian Business.
"We have some things in the pipeline to help us accomplish these goals," he noted. "We will be very active in the next few months."
In particular, Halkitis highlighted the upcoming discussion paper on tax reform, which the PLP plans to make public for widespread consultation. While the exact content of the proposal is unknown, VAT is believed to feature prominently.
The PLP has also expressed a desire to tighten revenue administration as it relates to the collection of real property tax.
"We want to radically reduce the amount of smuggling of tobacco programs, and generally push towards a central revenue agency to make the process more efficient," he told Guardian Business.
Insisting that The Bahamas is "not out of the woods," he nevertheless expressed optimism at S&P raising the short-term foreign currency sovereign credit ratings. He said that the decision should make the cost of borrowing money lower.
That said, the PLP's priority during its administration will be to drastically reduce its deficit, which is projected to be $550 million, or 6.5 percent of GDP.
Overall government debt is forecast at $4.6 billion, or 54.57 percent of GDP by the end of the upcoming fiscal year.
Halkitis said that a debt management committee and debt management program are also being instituted to tackle the country's fiscal woes.
Francis at S&P explained the debt is not ideal, but "manageable." He said it has indeed been rising substantially in recent years, and the trend is in a negative direction. The analyst felt the actions of the new government will no doubt determine whether another downgrade could be in the country's future.
"We'll have to see how much worse it will get in the next couple of years. We have to see what the government comes up with," he said.
© 2012 The Freeport News