The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Government has "prolonged the punishment of savers" through its recent $750 million bond issue, a former finance minister has warned, as the effects work through the monetary system.

James Smith, also a former Central Bank governor, said the impact of the Minnis administration's foreign currency borrowing would be to further "suppress" already-low deposit rates in the banking system.

He added that data in the Central Bank's monthly report for November showed that Bahamian savers, both institutions and investors, needed to brace for a prolonged period of low returns on bank deposits as the proceeds from the $750 million bond flow into this nation.Excess liquidity, representing assets available for lending, but for which Bahamian banks cannot find suitable or qualified borrowers, jumped by $96.42 million in November 2017 alone to a record $1.849 billion. That figure represented a $402 million increase for 2017 to-date, with the Central Bank attributing the November rise to inflows from the Government's bond.

Some of the bond proceeds were used to repay short-term Bahamian dollar advances to the Government, also resulting in the excess liquidity build-up. And the country's external reserves also received a one-off boost as they grew by $229.2 million to close November at $1.436 billion.

"Reflecting the receipt of net proceeds from the Government's $750 million bond issue - after short-term loan repayments - the [Central] Bank purchased a net of $255.2 million from the public sector, a turnaround from the previous year's $47.3 million net sale," the Central Bank said.

Mr Smith told Tribune Business that the Central Bank data reinforced his view that the Minnis administration would have been better off trying to meet more of its financing needs in the domestic capital markets, rather than increasing the Bahamas' foreign currency borrowing and associated debt servicing costs.

"Right now we're punishing savers, and savers are the guys you really want in the economy," he said, given that the increased excess liquidity and money supply would further depress interest rates.

"This [the bond effects] elongates the timeline for adjustment in the monetary sector. It will take a longer time for the banks to pay positive interest rates over and above what they're paying now, 0.5-1 per cent. Because of the excess liquidity they can't, so they're not paying anything on savings deposits."

The Bahamas is generally considered to lack a widespread savings culture, and Mr Smith warned that prolonged low yields would further discourage persons from contributing to a capital pool that could finance much-needed domestic investment and job creation.

"It can have a terrible effect on the economy," he told Tribune Business, "because savers become disgruntled by not getting anything on their deposits in the banks, and may start making riskier investments outside the banking sector, funding businesses that cannot get a loan from the banks.

"It discourages savings even more. Every economy needs savings. It's really a corollary of investing. The one thing you don't want to do is discourage savings in the economy because, at the same time, it means dampening domestic investment and dampening job creation. Fortunately, it's [the bond] not an extreme amount, but it will exacerbate."

The Government has already defended its decision to tap the international capital markets. K P Turnquest, deputy prime minister and minister of finance, previously told Tribune Business that the Government would 'mop up' the excess commercial banking liquidity by placing the $570 million 'balance' of its $1.322 billion financing "envelope" in the local market.

He added that the Minnis administration had acted on strategic advice received from the Central Bank and other financial institution, which will have included its bond placement agents, Deutsche Bank and Royal Bank of Canada (RBC).

However, Mr Smith said receipt of the $750 million bond proceeds had acted as "a quantitative easing when you don't really need it" in terms of holding down deposit rates.

"All of this had to be converted to Bahamian dollars and increased the money supply, potentially suppressing interest rates even more and for a longer period," he told Tribune Business.

"It's a straightforward conversion; if you borrow additional money in foreign currency to pay Bahamian dollar debts, it has to be converted to Bahamian dollars and increases the money supply. It's kind of a quantitative easing when you don't need it."

Noting the Central Bank's $255 million foreign currency purchase from the Government, Mr Smith added: "The money was paid in straight to the Central Bank, who in turn had to convert it to Bahamian dollars.

"What you have is you increase the foreign borrowing, which then has to be repaid with interest. The preferred method for dealing with that part of the monetary sector would be to pay down foreign currency debt with inflows from foreign direct investment and tourism spending.

"We just borrowed foreign currency, increased the reserves and have to use that amount to pay it back - and the interest on it. That's unsustainable; we're just delaying paying the piper."

Mr Smith warned the Government against foreign currency borrowings for 'balance of payments' support, and to underpin the one:one peg with the US dollar.

He added that Bahamian banks also needed to be given a reason "to nudge up interest rates on deposits and eliminate some of their non-interest charges for cashing cheques and wire transfers".