The Tribune

By NEIL HARTNELL

Tribune Business Editor

The Bahamas’ already-low national savings rate fell by a further 5 percentage points during the recession’s peak to just 10 per cent of GDP, a Wall Street credit rating agency has revealed, warning this “may force difficult” fiscal and social security-related decisions upon the Government.

Standard & Poor’s (S&P), in a paper looking at the sovereign debt issues impacting various Caribbean nations, contrasted the “stubbornly low” national savings rates in the likes of the Bahamas and Barbados with those achieved by emerging Asian economies, who had grown theirs to more than 44 per cent of GDP by 2007.

The international credit rating agency urged the Bahamas and its Caribbean counterparts to improve their national savings rate, and reverse the decline in foreign direct investment (FDI), if they were to enjoy “consistent economic growth”.

Noting just how reliant the Bahamas was on FDI to finance its annual import spending, S&P’s data showed that foreign capital inflows, as a percentage of this nation’s current account deficit, rose from 44 per cent between 2000-2003 to an average 108 per cent between 2004-2007.

The latter period represented the peak of the last ‘boom’ in the global economic cycle, when the first Christie-led administration was in office. The S&P data effectively implies that between 2004-2007, the Bahamas was attracting enough FDI to more than cover its current account deficit, but - due no doubt to the recession - this indicator fell back to an average of 92 per cent between 2008-2011.

S&P also revealed that with debt servicing (interest) costs standing at 13 per cent of general government revenues in 2011, the Bahamas’ had the third highest national debt repayment burden in the Caribbean.

And the Wall Street credit rating agency also brought into sharp relief the rapid trajectory at which the Bahamas’ national debt had grown, noting that it had risen as a percentage of GDP by 128 per cent over the decade between 2001-2011.

S&P’s report, released last week, provides further food for thought for the Bahamas’ fiscal policymakers, its timing coinciding with the Christie administration’s final 2012-2013 Budget preparations.

The implications of the S&P report, together with Moody’s recently-expressed criticisms of the new government’s proposed $250 million mortgage relief plan, are that Wall Street and the international markets, together with the likes of the International Monetary Fund (IMF) will be scrutinising the upcoming Budget details for signs the new Bahamian government is committed to fiscal prudence.

With the Government likely facing a fiscal deficit of between $400-$500 million, and new borrowing resolutions (commitments) of a similar sum, it is probable the Christie administration - given its no new taxes pledge - will try to hold the line and contain the national debt/fiscal deficit, while praying that the economy turns around.

Still, the S&P report, Caribbean Debt is on the Rise, written by analyst Kelli Bassett, with help from Olga Kalinina and Lisa Schineller, the latter two who have carried out assessments of the Bahamas’ sovereign credit rating in recent years, highlighted the relatively poor level of domestic savings and investments in the Bahamas.

Noting that this was due to both private (individuals and businesses) and government sector decisions, the S&P report said: “In response to the economic downturn, some Caribbean societies (both governments and private citizens) have drawn down savings to finance current expenditure or simply saved less as local economies struggle with high unemployment, weak external FDI inflows and low tourism revenues.

“In the Bahamas and Barbados, both of which have social safety nets, gross national savings have fallen. According to the IMF, the Bahamas’ gross national savings fell to an average of 10 per cent over 2008-2011 from an average of 15 per cent of GDP over 2003-2007.”

The Bahamas’ gross national savings rate, S&P added, was below the Caribbean average of 13-20 per cent for the past decade. Describing the latter as “stubbornly low”, the rating agency said developing Asian economies were leaving the Bahamas and its regional counterparts in their wake, growing their national savings rates from an average 31 per cent of GDP in 2000 to more than 44 per cent in 2007.

Assessing the implications of all this, S&P concluded: “The rise of public sector debt in the Caribbean has also been fuelled, at least in part, by low national savings, reliance on external financing for investment, and volatile current account balances.

“Given that the Caribbean’s slow recovery from the economic crisis is now entering its fourth year, the low rates of national savings may force difficult social and political discussions on fiscal sustainability, national welfare and social safety nets as public sector and personal resources come under increasing strain.”

S&P added that the Bahamas’ relatively low national savings rate meant that, as a small, open economy, it was heavily reliant on FDI and external capital to finance consumption, investment and its current account deficit. This, in turn, placed it among countries most vulnerable to external shocks - such as the global recession.

The Bahamas, in common with the likes of Barbados, Jamaica, Belize and Grenada, was relying on net FDI inflows to cover more than 40 per cent of its current account deficit. Of those, only Belize was more reliant on FDI.

And, warning that a rising national debt acted as “a drag on fiscal spending” and sucked away revenues from social security, infrastructure and other spending priorities, S&P said only Jamaica and Belize carried higher debt servicing burdens than the Bahamas in the Caribbean.

In Jamaica, 44 per cent of government revenues went to cover debt interest costs, while the percentage for Belize was 14 per cent.

“The Bahamas and Barbados’ debt servicing costs have also grown as a result of their rising debt. Each respectively paid 13 per cent and 12 per cent of general government revenues for interest in 2011,” S&P said.

A chart embedded in the report showed that the Bahamas’ debt servicing costs had remained stubbornly in the 9-10 per cent of government revenues range between 2000-2007. A steady uptick occurred from 2008 onwards, as the Ingraham administration steadily borrowed both to cover recurrent costs and various capital/infrastructure works programmes to prevent the bottom falling out of the Bahamian economy.

What the S&P report shows, above all, is that unless economic growth resumes, unemployment is reduced and the Government sets the national debt and fiscal deficits back on to a more sustainable path, there will come a time when the Bahamas has to ‘pay the piper’.

For this nation’s net public sector debt, as a percentage of GDP, has risen from a relatively comfortable 20 per cent of GDP in 2001 to 48 per cent at end-2011. The decade-long increase encompasses both the first and second Ingraham administrations, and the first Christie government, both contributing to eating up the ‘fiscal headroom’ the Bahamas once enjoyed.

Again bracketing the Bahamas and Barbados together, the S&P report said: “Barbados’ net public sector debt as a share of GDP was 110 per cent greater at year-end 2011 than in 2001, and the Bahamas’ was 128 per cent larger.

“However, Barbados’ net public sector debt, at 98 per cent of estimated GDP in 2011, eclipses that of the Bahamas’ at 48 per cent. The erosion of each sovereign’s fiscal position has contributed to a series of downgrades.”

Just as a reminder, S&P said it had downgraded the long-term foreign currency rating of ‘A-’ handed to the Bahamas in 2003 to ‘BBB+’ in 2009 and ‘BBB’ in 2011, due to the decline in the fiscal and economic situation.

The rating agency added that “debt management strategies will continue to be important considerations” for the Bahamas.