Moody's: Deficit Expected To 'Accelerate'

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September 10, 2012

A top rating agency says it remains "unclear" whether the country's economic recovery can be sustained due to its dependence on the U.S. economy. According to the latest credit opinion from Moody's, tourism arrivals and occupancy rates have improved in 2012. The assessment has indeed been confirmed by top government officials in recent weeks. However, revenues lag behind pre-recession levels, Moody's explained, depressed by competition from other Caribbean markets and weak growth in the U.S. Stuart Bowe, the president of the Bahamas Hotel Association (BHA), noted in its last report that daily room rates continues to fall.

Promotional investments and airfare offers have become increasingly common among tourism stakeholders. Although it brings people into the country, the approach has revenue implications. As first revealed by Guardian Business, the Ministry of Tourism is rolling out a $6 million air credit program that will last all the way until the first quarter of 2013. "Given increased economic uncertainties currently facing the U.S. - the Bahamas' major tourism market - it is unclear whether the economic recovery will be sustainable," the report said.

Analysts reported that the country's financial deficit continues to widen, financed primary by short-term domestic borrowing. "We expect this pace to accelerate as the government increases capital spending to support several resort developments and social spending on programs such as the mortgage support plan," Moody's explained. "Foreign currency debt, which accounts for 56 percent of total government debt, is on the rise as well, albeit at a slower pace."

That said, Moody's noted that the economy is on track to achieve growth of 2.5 percent in 2012, a fact recently confirmed by Michael Halkitis, the state minister of finance. The modest growth is being driven by "a modest recovery in the high value-added tourism sub-sector, public sector investment in construction, and foreign direct investment in the tourism sector". Credit growth, however, has remained "relatively flat", according to Moody's, and the unemployment rate still hovers beyond 15 percent.

The rating agency noted the recent strides by the government to revisit the issue of taxation. That development is welcomed by Moody's. Back in May, the rating agency felt increased spending was not being properly matched by new revenues. The introduction of a value-added tax, for example, would bring The Bahamas in line with a number of other countries in the region and promote revenue stability.

The comments from Moody's follow a recent statement to Guardian Business by the International Monetary Fund (IMF) in Trinidad and Tobago. Caribbean leaders convened in Port of Spain to discuss rising Caribbean debt and limited prospects for growth. For The Bahamas, mission chief for the IMF Gene Leon confirmed that the troublesome debt-to-GDP ratio of the biggest problem facing the country's fiscal future. He confirmed that the organization has provided debt management consultation services in the lead up to its visit in October. Including its continent liabilities among public corporations, he said the debt-to-GDP ratio had fallen into the "gray zone" of above 60 percent.

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News date : 09/10/2012    Category : Business, Nassau Guardian Stories

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