The Tribune

In the final of his three-part series, Hubert Edwards suggests how The Bahamas and other nations can blunt the impact of sovereign credit downgrades.

This series of articles has so far provided perspectives on the extent of the economic dislocation caused by the COVID-19 crisis, with a leaning towards sovereign debt financing and concerns facing policymakers. We looked at the potential for sovereign downgrades and defaults, and outlined some of the risk factors at play.

If all that we have explored in this paper holds true, the ability to apply a range of classic fiscal responses may be limited. Essentially, it will be a matter of affordability. Will The Bahamas, Jamaica and the rest of the Caribbean be able to afford the stimulus needed to move economies forward? For context, let us consider highlights from our previous papers. We pointed to the analyses done by the Inter-American Development Bank (IDB) and Caribbean Development Bank (CDB). According to the IDB, using a highly tourism-centric modelling, a worst-case scenario could see countries in the region losing up to 30 percent of GDP. The same was confirmed by the CBD using a more diverse model. For The Bahamas, this translates to a loss of almost $4bn. The impact on unemployment, government revenue, poverty and standards of living should be immediately clear to keen observers. Proactive steps are therefore an imperative. Moving quickly carries one important benefit. It will provide important information to policymakers as to what potential shortfalls they might face, and the level of creativity and ingenuity (non-traditional responses) that may need to be brought to bear to help solve their country’s challenges.

Firstly, as a pro-business stance, and while accepting there are important limitations, policymakers must move strategically to explore how best to reopen economies. The objective is to limit the fall-out in terms of potential corporate bankruptcies, increased unemployment and a narrowing of fiscal revenues. The latter is important in the face of the increased need for state-facilitated safety nets. To aid the business sector and the wider economy, it must be structured; well-informed by public health experts; and built on the foundation of clearly-articulated protocols that always err on the side of public safety first.

Countries should move as quickly as possible to secure the maximum amount of loans possible based on careful needs analysis. In some instances, while the realities will not escape lenders, taking action before the next scheduled credit review could be advantageous. We clearly understand that this financial crisis will automatically create triggers that allow sovereign reviews to be initiated. Most certainly, any foray into the market seeking loans will provoke a reaction from the rating agencies. Still, we believe there is value in getting ahead of the curve and securing what is needed and/or available. Those countries that do so will be able to bring greater certainty to their economies. They will also be better able to communicate strategies to the private sector and citizens, and signal a nation’s readiness to start moving the economy forward. With an expected contraction in foreign direct investment dollars seeking a home, the “early bird” countries in the region are likely to get the first bite of the necessary financing to prop up their economies

It is likely that we will see sovereign defaults across the globe. Caribbean leaders loathe defaults, and history suggests they will pay away the country’s last dollar rather than default on a loan. Regional leaders may therefore wish to, as a block, call for moratorium on loan repayments by their lenders. Looked at from a global perspective, this achieves the benefit of freeing-up cash that can be spent locally while settling the market for sovereign debt by not triggering a potential rash of defaults. This is a sound argument on which such a call can be made. A period of two to three years could prove beneficial for most countries, especially those that find themselves at a high debt-to-GDP level. This strategy does suffer one important weakness, and that is without foreign currency inflows the “cash saved” in the near-term may soon be non-existent, and there will still be a need for further capital (debt) injection.

What could a substantial programme of relief look like? An examination of what Jamaica was able to achieve through two International Monetary Fund (IMF) programmes provides important clues. While they were not the same as a moratorium, the message is in what can be achieved when funds are available to invest back into the local economy. This same stimulating impact is possible, albeit on a more constrained basis. What is the likelihood of a debt repayment moratorium emerging? We cannot say, but would quickly point to the potential need to avoid a situation that led to the Brady Plan for Latin America. Policymakers should look to history in formulating sound arguments for the benefit of individual countries and the region as a whole.

Countries should start taking advantage of concessionary loan facilities from the IMF and other multilateral agencies. This requires quick decisions and nimble action, as the demand will be significant. The IMF itself has made the call for debt relief for low-income countries. Ultimately, lenders want assurance they will be repaid. The longer loans are rescheduled, especially in an environment with the threat of a global financial crisis, the more potential there is for a debt default. However, with support from the likes of the IMF, lenders may be willing to agree to payment holidays on the basis that the economy will have a chance to rebound.

Credit ratings will continue to hold great sway over how the market views a particular sovereign. Downgrades may be inevitable, but the strategies for recovery could be the “x-factor”. Policymakers should not assume that the normal fiscal responses will be effective or sufficient. This is a time where clear, cogent and practical strategies can bring great value in blunting the risk. Understandably, most emerging economies are likely to be, at best, stable. Our assessment of sovereign ratings shows this is definitely so concerning the Caribbean. However, in those cases where the fundamentals are weak and the outlook is negative, effectively laid-out plans can blunt the impact of this outlook and place the country in a more favourable position for attracting debt financing at reasonable rates. The unfavourable economic circumstances are systemic, so any action that reduces the risk premium for lenders is a victory for any country.

Policymakers should consider engaging with borrowers to secure all undrawn loan facilities. Where these were granted with specific or narrow purposes, as most loans are, then an agreement to repurpose for broader fiscal application should be secured. This will provide an important boost to the stimulus efforts. Where funds were initially earmarked for enabling or facilitative projects that have long-term economic impact, it may be wise to not change course but instead make strategic adjustments to account for the need to stimulate commerce. For example, a project which can be executed by a local professional, who may not have had the capacity previously, could be used to boost employment. Restrictions on the sourcing of outside expertise can be lifted.

We are of the view that the COVID-19 crisis will present challenges well beyond the borrowing capacity that exists in any one country. This is a great time to rally the resources and geniuses of a nation. It is a time to call on the country’s entrepreneurial class. It is a necessary and appropriate time to re-evaluate the extent to which government systems adequately facilitate economic opportunities for citizens and residents; revamp policies; search for value in dormant or underused legislation; and make decisions that before would have been unpopular but have economic, social and financial value. Where this is not the case, it should be fixed. Where this is so, enhance it. We argue for this on the basis that a stronger and more robust economy may be the best antidote for correcting the economic fall-out and creating insulation against the next crisis, but also to respond to the important economic and political changes that we will see.

CONCLUSION

COVID-19 has created a global economic crisis that will continue to challenge many emerging economies, including the island states of the Caribbean. Without question, there will be limitations of resources. Economic pressures leading to downgrades will also exert a negative influence on the ability to secure capital inflows at reasonable rates. However, rational and practical economic plans could blunt the effects of downgrades and paint a country’s future in a better light despite current negative circumstances.

Policymakers in The Bahamas, Jamaica and the rest of the Caribbean should act quickly. There is an opportunity to move as a region in seeking relief. Whatever approach is taken, one thing is clear. The region has significant vulnerabilities and lacks sufficient economic diversity. How policymakers decide to respond, and the extent to which they move quickly and reject the “business as usual approach”, will be fundamental to post-event recovery and long-term success.