S&P predicts ongoing economic growth momentum Decline in fiscal deficit expected to continue Debt projected to fall to about 73.4 percent of GDP
In a full analysis of the Bahamian economy and the government's fiscal position, S&P Global Ratings, the credit rating agency, projects that economic growth will support government revenues and help contain government expenditures, leading to smaller fiscal deficits over the next 12 months.
"We expect the domestic market and multilateral lenders will meet the country's relatively large financing needs," S&P said in its latest report.
It said: "The Bahamian economy has shown strong growth through 2023, supported by continued recovery in tourism, although we expect medium-term growth prospects will return to historical levels.
"The Bahamas' (B+/Stable/B) economy has significantly improved since the contraction in 2020, spurred by the important tourism sector, and we expect that GDP per capita will recover to close to 2019 levels by year-end 2023.
"The strong recovery has been supported by its key U.S. source market, where recessionary headwinds did not weigh on growth over the past year. We continue to see a steady flow of tourism-related investments, combined with prospects to expand airline capacity and flights into the country.
"We expect that fiscal deficits will continue to decline and the pace of nominal debt growth will slow, translating into a gradual reduction of our net debt-to-GDP ratio, although the interest burden will remain high.
"The expanding economy is supporting government revenues, which increased almost 12 percent in the most recent fiscal year.
"While some of the pandemic-related programs are ending, the interest burden, combined with other spending rigidities, including state-owned enterprise (SOE) outlays, continue to weigh on expenditures."
S&P expects the deficit reached 4.6 percent of GDP in fiscal year 2022-2023 (ended June 30, 2023) and projects it will further fall to 3.2 percent in fiscal year 2023-2024.
The S&P report, dated September 18, does not constitute a rating action. The Bahamas' rating remains at B+/stable as assigned by S&P on November 12, 2021.
While its outlook for the Bahamian economy is stable, S&P presented a downside scenario.
It said, "We could lower the ratings in the next 12 months should economic performance lag, pointing to GDP per capita remaining below our expectations. We could also lower the ratings if the sovereign's access to external liquidity were to deteriorate unexpectedly."
There was also an upside scenario.
S&P said, "We could raise the ratings in the next 12 months if the government advances faster than we expect to enact meaningful public finance reform, demonstrating an ability to raise revenues and leading to sustained near-balanced financial results and improved economic prospects."
The agency expects a stronger 2023 given continued recovery and expansion in tourism.
S&P said, "The Bahamas' economic recovery during 2022 was robust, with GDP growth estimated at 14.4 percent. The country benefited from its proximity to the U.S., its largest tourism market.
"Total arrivals into the country in 2022 were 7.0 million compared to 2.1 million the year before, which is about 96 percent of 2019 levels.
"Tourists from the U.S. continued to remain the major contributor, with more modest recovery occurring in markets such as Canada and Europe.
"We expect the growth momentum to continue through 2023, backed by continued recovery from the pandemic. The number of inbound arrivals reached five million in the first half of the year, compared to three million during the same period in 2022.
"Furthermore, there are new flights that will be launched from the U.S. to The Bahamas, as well as a continued pipeline of tourism-related projects planned and underway over the next few years."
S&P noted, "Although these projects will continue to support growth, they also reinforce dependence on the volatile tourism sector. The economy remains concentrated in tourism, which typically contributes at least 40 percent of GDP."
The agency added, "We expect real GDP growth next year to return to historical levels of 1.8 percent. GDP per capita will be $36,456 in 2024."
S&P said that in the next 12 months, it does not anticipate material new revenue-generating tax measures, and expects the government to rely on growth to provide enough buoyancy to revenues to support the budgetary outturn.
"Improvements to tax collections (via a dedicated revenue enhancement unit, among other initiatives) and its property tax roll (through which it expects to generate an additional $120 million a year) should support fiscal performance over the next few years," the agency said.
"On the other hand, we believe that material spending cuts will be more difficult to implement.
"Efforts going back many years have failed to reform the country's SOEs, which remain a drain on government finances.
"The government typically spends about 15 percent of its total expenditures on ongoing subventions, while it has also been called on to support guaranteed debt of SOEs.
"At the same time, the increasing interest payments on debt, exacerbated by the pandemic and high interest rates, have weighed on expenditures.
"We expect declining deficits and a growing economy will lead to a slow decline in The Bahamas' net debt burden and financing needs. However, the country remains vulnerable to refinancing risks based on its significant short-term debt, with almost 28 percent of debt maturing in the next year, although the government expects this will be largely rolled over in the domestic market."
S&P expects the government's net debt will fall to about 73.4 percent of GDP by the end of 2024 from 82.6 percent in 2020, while interest payments will remain above 15 percent of government revenues for the next three or more years.
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