The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The $2bn foreign exchange reserves are less healthy than they appear because of the Minnis administration’s “worst ever mistake”, a former Central Bank governor argued yesterday.

James Smith, also a former finance minister, told Tribune Business that the nation’s foreign currency reserves had been artificially boosted by the $750m US dollar bond that the government placed in the international markets in November 2017.

Pointing out that this represented “borrowed” money rather than inflows “earned” from tourism and foreign exchange activity, Mr Smith said the current pressure imposed by the COVID-19 crisis showed why he had misgivings at the time about the bond issue.

Reiterating that it had created a currency “mismatch” by repaying Bahamian dollar debt using foreign currency, he explained that the borrowing had created a further “claim” on The Bahamas foreign reserves through the extra US dollar interest and principal it will have to repay to investors.

Backing the Central Bank’s decision to suspend approvals for dividend repatriations by the Canadian-owned banks to their international parents as a way to preserve the foreign currency reserves, Mr Smith said the move was a further sign of the deep “stress” imposed on the Bahamian economy by the pandemic.

“If you drill beneath you’ll find it’s not $2bn,” he argued of the reserves, “because in the first instance it’s generated by a balance of payments support loan. I think that’s the biggest mistake they ever made.

“You don’t mismatch your currencies. You don’t borrow in foreign currency to pay back your domestic debt. The result of that, immediately when you make that borrowing, is that money is sold to the Central Bank and put in the reserves. Now the Central Bank has hundreds of millions more in its reserves than it didn’t earn.

“Normally reserves are added to by trade, the net spending of tourists. When $700m of that is a balance of payments support loan, it says we’re doing well but we didn’t earn that from net inflows, tourist spending. Now, with COVID-19, you’re not getting the inflows but still have to feed the nation and pay back the foreign currency debt associated with that $750m.”

Marlon Johnson, the Ministry of Finance’s acting financial secretary, defended the $750m US dollar bond placement at the time and pointed out that it had only been undertaken after consultation with the Central Bank.

He added that the Minnis administration had decided to tap the international capital markets because there were limits locally on how much government paper can be held by the Bahamian commercial banks, and the size of the market generally. Some $300m of the foreign currency borrowing was used to repay Bahamian dollar-denominated bank loans and Treasury Bills.

Multiple private sector contacts have expressed alarm at the Central Bank’s decision to halt the payment of dividends by the Canadian banks, thereby interrupting what has long been seen as a cornerstone of the Bahamian investment regime - no obstacles to profit repatriation by a foreign investor.

Apart from the impact to investor confidence, the Central Bank’s move was also interpreted as a sign of just how much trouble COVID-19 has left The Bahamas in. William Wong, a former Bahamas Real Estate Association president, told this newspaper of the regulator’s action: “I don’t know how many people appreciate that, but it’s a serious statement. That’s very serious.

“When I was working in the banks, every three months we used to send millions of dollars outside the country. Now it’s stopped. That’s a big, big statement right there. Wow.”

Robert Myers, a businessman with interests in sectors ranging from construction to landscaping and hardware, yesterday told Tribune Business the Central Bank’s action was an indication of how concerned it is about pressures on the reserves that ultimately support the one:one exchange rate peg with the US dollar.

With no tourism inflows to replenish the reserves, he argued that the Government needed to “stimulate” construction-related foreign direct investment (FDI) with time-limited real property and transaction VAT cuts to entice overseas developers and homeowners.

“They wouldn’t do that if they were not worried about the reserves and the peg,” Mr Myers added. “That’s a pretty draconian measure, a pretty harsh policy to say you cannot send a dividend to a foreign parent. That’s telling you something, right?”

The Bahamas, as a nation that imports virtually all it needs for consumption, faces a massive foreign reserves drain without any inflows to replenish them amid the ongoing tourism industry shutdown. While the reserves were said by the Central Bank to remain at $1.995bn in March, just as the COVID-19 pandemic took hold, they are projected to fall by $1bn over the course of 2020.

The Government’s foreign currency borrowings amount to just over one-third of its total debt, and Mr Smith said this component would be far more difficult to reschedule given that it is held by international money managers, institutions and other foreign investors.

Suggesting that the Central Bank had likely acted out of “an abundance of caution”, and would have discussed its intentions with the Canadian-owned banks beforehand, Mr Smith reiterated: “You have reserves that are not necessarily what they appear to be and look higher than they are because they’re being propped up by the Government.

“It’s a double whammy in a way, and you might have a perfect storm in terms of the impact on the foreign reserves.... It is actually an indicator of the stress under which we find the economy. We import everything we consume, our ability to import depends on our foreign currency holdings, and foreign exchange depends on tourism inflows. We have no tourists coming in.

“We have competing demands for the international reserves. These are to pay off the country’s foreign debt, pay for food imports and other services needed by the public, and profits repatriated by the banks. It can’t happen at the same time, so we have to make some choices.”

Mr Smith said he was unable to recall any previous suspension of bank dividend approvals. The Central Bank has said it will keep the move under regular review through September 2020.