The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas' "financial reputation" will be in peril without "emergency borrowing" of $400 million, with the 'junk' downgrade having exposed the Government to a $70 million cash demand.

K P Turnquest, minister of finance, told Tribune Business that Standard & Poor's (S&P) action earlier this year had left the Government on the wrong side of a "hedge" or derivative transaction relating to some of its borrowings.

The loss of 'investment grade' status triggered an immediate demand by the lenders for $150 million in extra collateral, with the Government having to provide "a minimum of $70 million" by the first week of July - the first seven days of its 2017-2018 Budget year.

Mr Turnquest did not provide in-depth details on the 'hedge', other than to reveal that the Bahamas' creditworthiness downgrade by S&P resulted in the Government "immediately" facing demands for extra loan security "in excess of $150 million".

"While this does not represent an expenditure, it does represent a use of cash which has to be funded by revenues," he told the House of Assembly yesterday. "The Ministry of Finance was partially successful in negotiating temporary waivers, but the obligation has not gone away.

"The Government is now required to provide a minimum of $70 million by the first week of July to meet this collateral call."

Mr Turnquest warned that the lenders' demands for extra security would increase should the Government suffer further downgrades, and disclosed that exiting the 'hedge' was "not recommended" as it would require a $120 million-plus payment.

When questioned by Tribune Business about the transaction, he replied: "That relates to a hedge on a loan. If I recall correctly we have to come up with $70 million to collateralise one of these derivatives transactions."

The lenders' demands were revealed to help explain, and justify, why the Minnis administration is seeking Parliamentary authority to borrow $400 million to cover unfunded claims dating from the 2016-2017 fiscal year. Without it, the Bahamas will be in jeopardy of defaulting on some of its loan obligations.

Besides the $70 million 'hedge' fall-out, Mr Turnquest said the $400 million was required to cover the Treasury's $161.284 million payments backlog, representing transactions that required funding.

And, completing its financial exposure, the Government also faces $130.781 million in unfunded commitments - representing promises to pay vendors once the goods or services have been delivered.

"This figure is not exhaustive, as we are aware of further unrecorded commitments," Mr Turnquest said. "While the Government is not insolvent, it is clear that it has a liquidity challenge and, as a result, employees and vendors have had to wait an inordinate time for payment.

"Many civil servants have had to suffer challenges with deductions [for loan payments] not being paid in a timely manner to the bank and other lending agencies.... We faced an immediate cash flow shortage that caused many payables and salary deductions to be delayed as we robbed Peter to pay Paul, so to speak. "

Mr Turnquest's comments illustrate how the Government's financial challenges are negatively impacting individual Bahamians and households, plus the wider economy, with public officials unable to meet their obligations through no fault of their own.

They also highlight, in a very real sense, how downgrades to the Bahamas' sovereign creditworthiness have a direct impact on the Government's fiscal position and end up diverting scarce resources away from essential public services.

"The emergency borrowing authority was the only prudent thing the Government could do to protect the financial reputation of the Bahamas," Mr Turnquest emphasised.

He then blasted the former Christie administration for engaging in what was described as "sheer fiscal insanity" by allowing the recurrent deficit - the gap between revenues and the Government's fixed-cost spending - to balloon to as high as $498 million in the current 2016-2017 fiscal year.

Mr Turnquest likened this to a family having to borrow to pay for its weekly grocery and other bills, a situation that would eventually lead to insolvency. He argued that the Christie administration had "spent like drunken sailors" while giving "lip service" to the need for fiscal consolidation, pointing to how far away it was from its previously forecast $80 million GFS surplus for 2017-2018.

The Minister recalled how he and the former St Anne's MP, Hubert Chipman, upon hearing that projection questioned "what world are these people living in", given that the then-government was continuing to increase spending while also raising taxes on Bahamians.

Acknowledging that Hurricane Matthew's impact had contributed to the expected $500 million deficit for 2017-2018, Mr Turnquest said the figure had been inflated by the former administration "entering into many egregious commitments on the eve of the general election".

He added that new spending commitments were emerging every day, and said: "Commitments and contracts were signed between May 8-9, millions of dollars in commitments.

"It is evident that the blatant fiscal recklessness of the other side in the run-up to the general election was a major contributing factor. When they look back at the 8-9, they will have to explain to the Bahamian people why they entered into these contracts for services, employment and extension of contracts for people on contracts that should have ended."

Mr Turnquest cited 41 persons in Acklins who were hired on May 9, a day before the election. While his claims were challenged by Opposition MP, Glenys Hanna-Martin, the Minister said they were "calling, trying to find out how they will get paid and when.

"What is egregious is the previous administration gave these people the impression they would be long-term employees, when the contract for those people is three months," he added. "They have these people on three month contracts, and when that is up this government will have to make a decision."

Highlighting the growing gap between the Government's spending and income, Mr Turnquest said recurrent revenues had increased as a percentage of GDP by 5.4 percentage points - from 17.6 per cent in 2011-2012 to a projected 23 per cent in 2017-2018.

Yet over the same period, recurrent spending had risen by 8.6 percentage points to a forecast 28.6 per cent in 2017-2018. This, Mr Turnquest said, had resulted in the Government's recurrent fiscal deficit growing from 2.4 per cent of GDP in 2011-2012 to 5.6 per cent for the upcoming fiscal year.

Unless this was corrected, the Minister warned that the Government will "have to borrow ever more to cover everyday expenses", creating "an ever-growing vicious cycle that could begin to feed on itself continually if not corrected".

"It points out why we have to break this borrowing cycle," Mr Turnquest said.