The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas could face “harsh economic repercussions” from the recent US interest rate increase, a well-known financial analyst warning it could spark a ‘chain reaction’ impacting this nation’s borrowing costs and external reserves.

Kenwood Kerr, Providence Advisors’ chief executive, told Tribune Business that the Federal Reserve’s December decision to hike its Fed Funds rate by 25 basis points (0.25 per cent) would increase the cost of any foreign borrowings by the Government.

Debt servicing costs for Bahamian foreign currency debt issues are linked to benchmarks such as US interest rates when they are set, and Mr Kerr pointed out that this nation was already standing on weak ground given recent credit rating downgrades.

With the US set to now attract greater capital inflows due to the higher returns (interest payments) on offer, Mr Kerr suggested reduced foreign direct investment (FDI) flows to the Bahamas - and a potential reduction in tourism spending - may also further squeeze the foreign currency inflows/

He added that the stronger US dollar set to result from the Federal Reserve’s decision would also increase the cost of a Bahamian vacation for travellers from Europe and other destinations, due to this nation’s one:one dollar peg, hurting efforts to diversify source markets.

Mr Kerr said the first US interest rate rise “in almost a decade marks a significant economic transition point”, with between four to five more increases predicted in 2016 as the American economy starts to strengthen.

“While this is positive for bank depositors and leads to a stronger dollar, it means higher interest rates on credit cards, auto loans and mortgages,” Mr Kerr said, implying that US visitor demand and spending in the Bahamas may be impacted.

“While the US economy may be somewhat robust and needs to raise interest rates, the same is not the case for England, Europe and Asia. All these major economies are at different stages, and this heightens the uncertainty as they are challenged to grow.”

Looking at the immediate implications for the Bahamas, Mr Kerr said they included increased borrowing costs should the Government seek to place further foreign currency debt on the international markets.

He pointed out that the Government’s debt servicing costs, based on calculations by Moody’s, now stood at close to 15 per cent of Budget revenues, and were the largest line item at around $260 million.

“In the Bahamas, this [US] rate rise signals that all our external foreign borrowings will cost more,” Mr Kerr said.

“ This is compounded by a debt level nearing 70 per cent of GDP, slow to sluggish domestic growth, increased government spending, high unemployment, and the real prospects of another credit downgrade to junk level status. That would push borrowing costs even higher.

“With the absence of robust FDI interest and inflows, and constrained tourist spending, coupled with the uncontained domestic demand for US dollars and business demands for US currency to acquire inventory, it puts real strain on the external reserves, which are currently less than the standard three months of import cover. If these situations persist, the economic repercussions could be harsh.”

Many observers believe that Bahamian interest rates tend to follow their US counterparts, albeit with a ‘time lag’ of around one to two years.

The Bahamian economy’s current condition, with unemployment high and activity muted, means that the Central Bank will likely hold-off on any such action for some time yet, though.

With jitters over the health of the Chinese economy wiping billions off share prices across global stock markets, Mr Kerr said the US presidential election, coupled with ongoing financial turmoil in Greece and the volatile political situation in the Middle East, all threatened to derail the global economy in 2016 - with major implications for the Bahamas, given its openness and exposure to the impact of negative world events.

Closer to home, Mr Kerr said the Bahamas needed to urgently tackle its escalating crime crisis and persistently high 14.8 per cent unemployment rate.

“Real, immediate solutions are required to address this cancer,” he said of crime, warning that it was impacting not just tourism and the wider economy, but the Bahamian lifestyle, business operating costs and even healthcare.

“Youth unemployment exceeds 30 per cent,” Mr Kerr added. “We are in a period of structural unemployment and need real skills training to lift the general skills level. Skills training and retooling on a maximum scale is required.

“Notwithstanding the so-called doubling of the investment in education over the past three-and-a-half years, our people are still unskilled. What are we investing the money or resources in? What is the National Training agency doing? Why hasn’t the educational curriculum addressed these skills issues?

“Additionally, through tax policy, we must encourage the retail banks to provide funding for young entrepreneurs. This incentive could be reflected in their eventual corporate tax burdens.”