The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A FORMER finance minister yesterday warned that the Government’s $750 million bond could “slow down economic growth” by further increasing the banks’ $1.7 billion in excess liquidity.

James Smith, who ran the Ministry of Finance from 2002-2007, told Tribune Business that he “cannot agree at all” with the Minnis administration’s decision to repay $300 million in Bahamian dollar-denominated debt with the bond’s foreign currency proceeds.

He said the repayment’s effect would be to increase the money supply and already-high surplus liquidity, which represents excess assets that Bahamas-based commercial banks are unable to lend out because they cannot find qualified borrowers locally.

The increased money supply, Mr Smith added, threatens to further depress deposit rates that are already close to zero, while providing no incentive for banks to get the economy moving through increased lending.

The now-CFAL chairman added that he was “not totally convinced” by the Government’s argument that there was insufficient demand to place the $750 million bond locally, or that institutional investors had reached their regulatory limits on the amount of foreign currency debt they can hold.

He revealed that Bahamian insurance companies had not received their full allocation from the Government’s domestic bond issue last month because it was oversubscribed, suggesting there was significant interest in its debt locally.

And Mr Smith also refuted the Minnis administration’s glee at obtaining a better-than-expected 6 per cent interest coupon for the $750 million bond, recalling that when in office he obtained a spread over 10-year US Treasury bonds that was 50 per cent less.

“I see their rationale for stretching out some short-term bonds so the debt payments will probably be less over a longer period of time,” Mr Smith told Tribune Business of the Government’s strategy.

“But I still have reservations about taking out Bahamian dollar loans with US currency. I don’t agree with it at all, unless there’s something I’m missing here. We have over $1 billion in excess liquidity and, by taking out Bahamian dollar loans and Treasury Bills, which are part of the money supply, you’re only increasing your liquidity.”

Tracking the knock-on effects, he added: “To get the economy going again you need access to credit, and banks are not putting out credit the way they used to because of the non-performing loans.

“Yet you have excess liquidity that has pushed deposit interest rates down, so banks are not paying anything to savers. By adding $300 million to the money supply, all you’re doing is increasing liquidity, and the length of time before before savers get positive interest rates has been extended. How long do you expect them to get nothing? You’re penalising savers.

“I’m more concerned that it may have the impact of slowing down growth locally,” Mr Smith continued. “The banks are not lending the way they used to, so they’re trying to make up the difference by fees and commissions rather than interest.

“They’ve pushed deposit rates almost to zero because they’ve got so much liquidity, and now you’re adding more to that. If there was some way of mopping that up, the consumer would benefit directly.

“Interest rates on deposits will be in positive territory, and because the banks get an additional revenue stream from the bonds bought from the Government, they will not need to add on all these fees. Five dollars to cash a cheque? They’re nickel and diming us, and now you’re putting them in a position where they have more liquidity.”

K P Turnquest, deputy prime minister and minister of finance, told Tribune Business that the Government would ‘mop up’ excess commercial banking liquidity by placing the $570 million ‘balance’ of its $1.322 billion “envelope” in the local market (see article on Page 1B).

However, Mr Smith told Tribune Business he was sceptical of the Government’s decision to first access the international capital markets for $750 million in foreign currency financing.

“I don’t buy that,” he said, “because the insurance companies have participated just last month in the Government’s bond issue and couldn’t get all their allocation because it was oversubscribed.

“I’m not totally convinced there was no local demand for it, as the insurance companies need long-term bonds to match their asset/liability mix and I know they were not able to get their allocation last month.”

Mr Smith was just as sceptical over concerns that institutional investors, such as banks and insurance companies, had reached their regulatory limits in terms of government debt holdings.

“If there was a limit they’d speak to their head offices and say: ‘It’s your choice between a zero interest rate and 5-6 per cent bond’,” he argued.

Suggesting that the Government’s advisers, Royal Bank of Canada (RBC) and Deutsche Bank, may have pushed it to go the international route, Mr Smith said the 6 per cent rate obtained for the $750 million bond was nothing to boast about.

That represents a 362.1 basis point spread above the yield on 10-year US Treasury bonds, but Mr Smith recalled when the Bahamas was able to obtain a spread of just 175 basis points during his term in office.

Much has changed since then, with Standard & Poor’s (S&P) downgrading the Bahamas’ creditworthiness to ‘junk’ status, but Mr Smith argued: “They’re saying 6 per cent is good. That’s not good at all. It just sounds good to people in Nassau getting 0 per cent.”