The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas must cut its external borrowings to 25 percent of total debt, a top accountant urged yesterday, warning that this nation is "not out of the woods" with the credit rating agencies.

Gowon Bowe, the Bahamas Institute of Chartered Accountants (BICA) president, told Tribune Business that this nation needed to slash the proportion of government debt held externally by almost 12 percentage points so that economic policy does "not become beholden to foreign bondholders".

His comments came after Moody's, the international credit rating agency, revealed that the Government's $750m bond issue late last year had caused foreign-held debt to increase to more than one-third of its total liabilities.

External debt as a proportion of The Bahamas' near-$8bn national debt jumped almost ten percentage points in one year to 36.8 percent, and Mr Bowe said: "I would like to see us trend back to 25 percent as opposed to 37 percent.

"If you ask the target I'd like, I would not have more than 25 percent of borrowings external. We are in a liquid environment, and should not take the easy way out of going to the foreign markets that lend if interest rates" are favourable to them.

Mr Bowe's last comment likely refers to the near-$2bn excess liquid assets within the Bahamian commercial banking system, representing funds that banks wish to lend but for which they can find no qualified or willing borrowers.

With such elevated liquidity locally, the BICA chief suggested the Government should tap the domestic markets for both Bahamian dollar and foreign currency borrowings to meet its financing needs.

"When it comes time for repayment, it's having the ability to do so locally rather than being beholden to foreign bondholders," he told Tribune Business. "External borrowing is not at dangerous levels, but the more you borrow from the outside world, the more influence they have on your economic policy."

Successive governments, with advice from the Central Bank, have traditionally sought to keep external foreign currency debt at minimal levels to avoid fiscal policy creating pressure in the monetary arena with respect to the one:one currency peg with the US dollar.

Increased external borrowings potentially raise pressure on the Bahamas' foreign currency reserves that support the peg, as this nation then has to earn US dollars through tourism and foreign direct investment (FDI) inflows to ultimately repay interest and principal owed to outside investors.

However, the share of the Bahamas' total debt held by external lenders increased under the former Christie administration and, now, the current government's $750m bond.

Mr Bowe's views echo those of James Smith, the former finance minister and Central Bank governor, who has also called for external foreign currency borrowings to be kept at a maximum 25 percent of total government debt.

His criticisms of last year's $750m bond issue, on the basis that it exacerbated the already-high surplus banking liquidity by using foreign currency borrowings to pay-off short-term Bahamian dollar debt, was met with a sharp rebuke by K P Turnquest, deputy prime minister and minister of finance, who said the Central Bank had been consulted on the Government's plans.

Mr Bowe yesterday said the near-37 percent external debt threshold was "not a concern" yet, but it highlighted the need for Government to develop a properly-articulated debt management strategy that minimised its liabilities and exposure.

Warning against complacency, he added: "We have to be mindful that we're up to 37 percent with foreign currency borrowings. We're not in a a position where the reserves are a static number, even though a lot of foreign currency from tourism expenditure gives flexible timing for payments and the ability to manage the reserves.

"We can manage [debt] payments if we have the appropriate strategy...... Moody's highlighted that the average tenor [time until principal maturity of government debt] was 10 years out, but ten years flies by. Ten years has passed since the recession, and it doesn't feel like that. Fall asleep and 10 years passes in the blink of an eye. We need a debt management strategy clearly articulated."

Moody's, in its annual in-depth analysis of the Bahamas, found: "External debt as a share of total government debt remains low at 36.8 percent in fiscal 2017-2018, up from 26.9 percent in fiscal 2016-2017. The share of external debt increased following the issuance of a ten-year, $750m international bond with a coupon of six percent in November 2017.

"Although the external financing environment has been favourable, increased reliance on external market funding has increased The Bahamas' vulnerability to a change in global market conditions in the medium term."

Mr Bowe said Moody's assessment indicated the credit rating agency was still giving the Bahamas breathing room to undertake the necessary economic and fiscal correction. While the past year had seen no significant slippage, any reforms enacted had yet to deliver concrete, measurable progress.

"I think their overall tenor and tone is saying we're not off the edge of a cliff, but we're not out of the woods and need to remain focused," he told Tribune Business.

"They've laid out the groundwork for a lot of the work the Government has to do with the private sector. Government really has to get its mind out of being an actual investor and partner, and focus attention on being a facilitator."

Moody's assessment paid particular attention to the need for energy sector reform and improvements to the 'ease of doing business', and removing structural impediments to increased economic growth.

"What they highlighted is they kept the rating where it is," Mr Bowe added of Moody's, "but this thing has not gone in a positive direction to remove the negative outlook, and if we don't do these things we are still at risk of a downgrade." Such action would see the Bahamas lose its 'investment grade' status and drop to 'junk', aligning Moody's with Standard & Poor's (S&P).

"Rome is not built in a day; things can't be corrected instantly," the BICA chief acknowledged, reiterating that the Bahamas needed to set targets - and timelines for their achievement - so it can show it is making measurable progress on fiscal consolidation and economic expansion.