The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A prominent investment banker yesterday argued that the risk of a Bahamian dollar devaluation is "minimal" because it is politically unacceptable and creates no economic benefits.

David Slatter, RF Merchant Bank & Trust's assistant vice-president of investments, told a webinar that there was "zero incentive for the Bahamas to lower or devalue its currency" given its dependency on imports for virtually all it consumes.

Suggesting that a devaluation would only fuel a surge in domestic inflation, produce a major drop in living standards and create little benefit for the country's competitiveness given that it is not a major goods exporter, Mr Slatter said he expected policymakers to do whatever was necessary to preserve the one:one peg with the US dollar should the need arise.

While acknowledging that the Government's foreign currency borrowing has helped to boost the external reserves, which act as the main support for the peg, to over $2.3bn at end-October 2020, he added that Barbados had shown it was possible to resist devaluation pressures when it took the issue "off the table" in negotiating its recent restructuring with the International Monetary Fund (IMF).

"There's zero incentive for The Bahamas to lower or devalue its currency," Mr Slatter argued. "We get $15bn from tourism and we only retain $1bn. $14bn is needed to earn $1bn.

"Devaluation makes imports more expensive and tourism less competitive. I think the risk of devaluation of the Bahamian dollar is so small it shouldn't be a factor in investment decisions."

Given the absence of tourism inflows for more than nine months, some observers will likely be less optimistic about The Bahamas' prospects of avoiding devaluation pressures especially since Central Bank governor, John Rolle, has voiced concerns about the external reserves levels come 2021 if the country's economic rebound is weaker than expected.

However, Mr Slatter reiterated his position subsequently to Tribune Business, saying: "I believe it's a very minimal possibility because there's no economic advantage to it."

Noting that a currency devaluation would have been both politically and socially unacceptable for Barbados when it negotiated its IMF assistance programme, he added: "I think we're in the same boat. I don't think it's politically acceptable to devalue the currency, and economically it doesn't make sense. I don't think it's likely."

However, the RF investments chief did agree that new and/or increased taxes could be imminent to pay for the debt and deficit blow-out inflicted by COVID-19 on the Government's finances.

Mr Slatter said his "gut feeling" told him that tax rises could come as early as next year due to the severity of the fiscal fall-out, with the national debt expected to surpass the $10bn mark by mid-2022 and this year's record deficit still projected at $1.327bn.

While many observers, including the IMF, have suggested that The Bahamas hold-off on any tax increases so as not to undermine the economic recovery from COVID-19, Mr Slatter said: "Out of necessity we'll have to do it. I'd say it would be early in the New Year to be honest, although I don't have any sources to pin it on.

"It's reasonable to expect taxation overall will increase. Whether that takes the form or an income tax or corporate tax, it's hard to say. The Government has to pay for all this debt it has accumulated."

Mr Slatter also revealed that he did not expect the Central Bank to relax restrictions on capital/portfolio investments by Bahamians abroad, which was one of the restrictions imposed to preserve the external reserves and reduce foreign currency outflows, until the 2021 second half.

"It all comes down to COVID-19 being brought under control, and the visibility for the Central Bank in terms of tourism inflows and feeling the economy's stabilised, and they have an idea and can make accurate projections of tourism currency inflows," he added.

"The investment currency market remains closed, and I do not expect it to open up until the second half of next year." Mr Slatter also advised Bahamians against "jumping whole hog" into the local listed equities market until more information became available on the roll-out of COVID-19 vaccines globally and the associated economic recovery.

"Over the next few months you can be selective, look at companies that pay dividends despite COVID-19, and have decent revenues and profits," he urged. "You need to look at their actual results through September.

"Do your research and get some advice, but to jump into the equities market whole hog at this point? No. You need to be tactical and know your risk. As we get into the firs quarter next year there will be more information and people will feel more comfortable getting into the broader equities market as a whole."