The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamian lifestyle “could be threatened” if this nation fails to turn the economy around and halt the cycle of repeated credit rating downgrades, a well-known financial analyst warned yesterday.

Kenwood Kerr, Providence Advisors’ chief executive, told Tribune Business this was “a real prospect” if the Bahamas’ economic competitiveness continued to slip, and policymakers failed to address the structural weaknesses cited by Standard & Poor’s (S&P) as a key factor in its latest downgrade decision.

Expressing “frustration” at this nation’s failure to take “corrective action” over long-standing problems that were well-known, and had been repeatedly flagged by international agencies such as the International Monetary Fund (IMF), Mr Kerr said S&P’s latest move was no surprise.

Describing higher economic growth as the “panacea” for the Bahamas’ ills, the Providence Advisors’ chief said a much more business-friendly environment was required to achieve this.

He cited reduced energy costs, in particular, as a development that would be akin to “a tax cut”, boosting the economy and helping to address the high unemployment and mortgage arrears rates cited by S&P.

Yet Mr Kerr expressed scepticism about whether the Bahamian economy could recover fast enough to avoid another S&P downgrade that would reduce it to ‘junk’ status, as he compared the Baha Mar “linchpin” to an oil tanker that had to be turned around in a harbour.

“If these things are anticipated, why aren’t we taking the corrective actions to deal with them? We know there are some fundamental things we need to address in the economy,” Mr Kerr said.

Acknowledging that S&P had given plenty of advanced warning about its intentions, Mr Kerr said consistent sovereign credit rating downgrades threatened to increase the Bahamas’ borrowing costs and undermine its ability to service its foreign currency debt.

This, in turn, would impose greater pressure on the Bahamas’ foreign currency reserves and its two main external earnings sources - foreign direct investment and tourism - to finance this debt servicing.

Suggesting that this cycle would ultimately “challenge” the Bahamas’ external reserves, debt servicing costs and currency peg if not broken, Mr Kerr told Tribune Business: “The lifestyle of the Bahamas could be threatened if that happens.

“I don’t want to be a scaremonger, but that’s a real prospect if it continues. It’s very serious. We’re sliding.”

He added: “What is worrying is the rate at which the external debt is growing, and our ability to borrow in US dollars. It’s beginning to become a problem.

“If our credit rating deteriorates, the cost of capital becomes a real issue, because our ability to attract foreign currency to repay this debt is thinning out. You’re borrowing all these monies in US dollars, the cost of borrowing is increasing and, at the same time, your repayment sources are dwindling and not growing.”

Mr Kerr said tourist spend per person was not increasing, and the sector was “under attack by competition from other markets”. And financial services, the so-called ‘second pillar’, continues to face pressures from regulatory initiatives such as the US Foreign Account Tax Compliance Act (FATCA) and the recent European Union (EU) ‘blacklisting’.

Besides the current Baha Mar impasse, S&P cited numerous structural economic weaknesses for contributing to its downgrade rationale.

“Growth bottlenecks, including high household indebtedness, loan arrears, and unemployment levels, as well as energy inefficiencies, continue to subdue growth prospects of the Bahamian economy,” S&P said.

“The rating agency, in predicting that this nation would suffer low GDP per capita growth of less than 1 per cent “over the next several years”, warned there was greater than “a one-in-three” chance that it could slash the Bahamas’ creditworthiness again within the next six months to two years.

Mr Kerr said the likelihood of a further downgrade, which would cost the Bahamas’ its ‘investment grade’ rating, was “very concerning” especially since it could come quickly.

He was sceptical, though, as to whether the Bahamian economy could rebound rapidly enough to ease S&P’s concerns and avoid a cut to ‘junk’ status.

“It really highlights the need to turn the state of the economy around in the shortest possible time,” Mr Kerr told Tribune Business.

“Unfortunately for us we may not be in a position to do so, as the linchpin project that is supposed to be the panacea for us [Baha Mar] is like a tanker turning around. That’s going to be long past six months. At best we can expect to maintain the rating.”

S&P reiterated to the Government that greater GDP growth rates needed to accompany its fiscal consolidation plans if the Bahamian economy was to be returned to a sound footing.

This was echoed by Mr Kerr, who said: “Growth equals jobs. Growth is the panacea we need.

“To get growth we need to reduce the cost of doing business. We need greater confidence in the economy. Capital goes to where it gets the best rate of return; that’s what attracts it, and where the environment is conducive to the conduct of business.”

The Providence Advisors chief executive added: “If we were to address the high cost of energy and energy inefficiency, that’s the equivalent of a tax cut or a tax credit.”

Apart from attracting more foreign direct investment (FDI) and boosting Bahamian investment, Mr Kerr said lower energy costs would free up income for households to meet their mortgage and debt obligations - thereby tackling two issues cited by S&P.

Businesses would also have greater cash flow and profits, enabling them to hire more persons and help reduce the jobless figures.

“How many times to we have to hear it before we address it?” Mr Kerr asked. “It’s just frustrating. We pretend to have the answers and nothing happens.”