The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank’s governor yesterday reassured Bahamians that their dollar is at no risk of devaluation because of Standard & Poor’s (S&P) decision to downgrade this nation to ‘junk’ status.

John Rolle confirmed to Tribune Business that “the fundamentals” underpinning the one:one fixed exchange rate peg will not change due to S&P, with the $928.6 million foreign currency reserves almost 50 per cent above international benchmarks.

“The ratings action has no direct impact on the already established outlook for external reserves which provide the support for the dollar,” Mr Rolle said. “The fundamentals do not change because of the ratings opinion.”

The Central Bank said the Bahamas’ loss of investment grade status with S&P would “not exert pressure on the sustainability” of the Bahamian dollar’s exchange rate peg, with the rating agency’s decision based on economic growth and fiscal indicators.

“It will, however, cause increases in the interest costs on some existing external debt and present some higher costs for new debt,” the Central Bank added, revealing that the impact of S&P’s actions has been felt immediately in the Government’s debt servicing costs.

The monetary policy ‘guardian’, meanwhile, said the opening of Baha Mar and other foreign direct investment-related hotel projects, would boost foreign currency inflows in 2017 and 2018, with reinsurance monies related to Hurricane Matthew claims payouts having a more immediate impact.

“External reserves currently stand at an estimated $928.6 million or approximately 17.4 weeks of merchandise imports, compared to the 12 weeks international benchmark,” the Central Bank said.

“Modest declines in external balances are still expected from these levels over the remainder of the year. However, the start of the winter tourist season should precipitate the traditional build-up in reserve levels.”

It added that the forthcoming implementation of a Credit Bureau would enable the commercial banks to engage in more “prudent lending practices over the medium-term”, while the 16 per cent of Central Bank licensees who had lost correspondent banking relationships had been able to either find replacements or rely on other, existing networks.

The Central Bank, meanwhile, acknowledged that the Bahamas’ national debt grew by $262.5 million over the 12 months to end-September 2016, closing the third quarter at $6.777 billion.

As a result, the total national debt-to-GDP ratio stood at 75.8 per cent at end-September 2016, up from 74.6 per cent the year before and well above the IMF’s 70 per cent danger threshold, which was struck at the same point in 2014.

The ‘direct charge’ on government is now equal to 67.6 per cent of GDP, while total public debt (Government’s direct charge, plus guaranteed and non-guaranteed debt) has jumped from 83.9 per cent to 85.3 per cent year-over-year.

“The Government’s overall deficit deteriorated during the first quarter of fiscal year 2016-2017, as broad- based expenditure gains outstripped the growth in total revenue,” the Central Bank’s third quarter review, released yesterday, said.

“Reflecting broad-based gains in expenditure by 7.2 per cent to $536.4 million, which negated the 2.9 per cent rise in revenue to $450.4 million, the estimated fiscal deficit deteriorated by $23 million (36.6 per cent) to $86 million during the first quarter of 2016-2017, relative to the comparable period of 2015-2016.

“Funding for the deficit was derived predominately from domestic sources and included a combination of long and short-term debt, while additional debt creating financing was also extended to two private entities.”

Those two entities are the new mobile operator, Aliv, in which the Government reinvested the $62.5 million spectrum fee received from its controlling shareholder, Cable Bahamas, to fund the majority investor, HoldingCo’s, share of the start-up costs.

Another $40 million was used for the Bank of the Bahamas rights issue, with the Central Bank revealing that both transactions impacted the Government’s “net overdraft balances”.

“The Government utilised approximately $40 million in deposits to invest in a rights issue from BOB, and redirected $62.5 million in auction proceeds secured from the cellular liberalisation process,” the Central Bank said.

Looking to the future, its November economic developments report, also released yesterday, said: “Expectations are that the fiscal position will continue to be adversely affected by the effects of the post-hurricane spending on repairs to Government infrastructure and social assistance programmes, along with lower tax revenues resulting from the implementation of a series of measures to support private sector recovery efforts.

“Expectations are that domestic economic conditions will remain mildly positive for the remainder of the year, with the potential for further strengthening in 2017 following the expected phased opening of the multi-billion dollar Baha Mar resort in the second quarter of the year.

“As a consequence, continued improvements in labour market conditions are anticipated. Inflationary pressures are poised to remain well contained. While the recent uptrend in global oil prices is likely to lead to higher energy costs over the near-term, the Bahamas should continue to benefit from the cumulative reduction in prices still sustained relative to averages recorded in the first half of this decade. Accordingly, the oil import bill should remain comparatively lower over the medium-term.”