The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas faces the “eye popping” prospect that the national debt will equal or exceed the size of its economy come June 2021, a University of The Bahamas (UoB) economics lecturer warned last night.

Rupert Pinder told Tribune Business that the Bahamian economy’s COVID-19 contraction, combined with government borrowings of more than $1bn to both cover its financial holes and stimulate the economy, would likely leave the country “on the cusp” of a 100 percent debt-to-GDP ratio at the end of the upcoming fiscal year.

With there being “no alternative” but for the government to borrow heavily in the short-term, Mr Pinder argued that “the real tale of the tape” in terms of how badly the pandemic has damaged the economy and government finances will only emerge when the 2020-2021 fiscal year is closed.

However, he said Hurricane Dorian and COVID-19 had only “exposed the cracks in the foundation” caused by the fiscal profligacy of successive administrations in continually expanding the size of governments and running deficits worth hundreds of millions of dollars every year.

Pointing out that these two events cannot be held solely responsible for The Bahamas’ increasingly perilous fiscal position, Mr Pinder described tomorrow’s budget as “a watershed moment for the country” given the critical need to set out an economic and fiscal recovery plan that will put it back on track.

He also voiced concern that the recent downgrade of The Bahamas’ creditworthiness by Standard & Poor’s (S&P), and the threatened similar action by Moody’s, could undermine investor confidence in this nation and deter foreign direct investment (FDI) at the moment it is most needed to replace the foreign currency inflows that have dried up as a result of the tourism shutdown.

Mr Pinder said there were limits on the government’s ability to undertake massive borrowings in support of an expansionary fiscal policy, especially in Bahamian dollars, because the country’s status as a non-producer that relies on imports for virtually all its consumption meant these funds would ultimately leak out via such spending and impose even greater pressure on already-strained foreign reserves.

Suggesting that this will effectively as a ‘cap’, to some extent, in limiting the government’s borrowing, the UoB economics teacher’s grim debt-to-GDP and near-term projections matched those of James Smith, the former finance minister and Central Bank governor, who also told this newspaper on Monday that the former ratio is likely to hit 100 percent by June 2021.

With K Peter Turnquest, deputy prime minister, having recently revealed that the government is now projecting an $800m fiscal deficit for the current 2019-2020 full fiscal year, Mr Pinder said this “gives you an indication of the magnitude” of the fiscal fall-out given that the period includes a full quarter of COVID-19.

Acknowledging that much depends on when the Bahamian economy re-opens, and tourism restarts, he argued that even if “a semblance of normality” returns by October this year The Bahamas “could be looking at a budget deficit of around $1bn when everything is tallied by the end of the year”.

While tomorrow’s Budget will be full of projections and forecasts, Mr Pinder said “the real tale of the tape will come on June 30, 2021, when the books are closed. My projection is that we will be looking at a recurrent deficit of around $1bn”.

That only measures by how much the Government’s fixed cost spending (wages, allowances and rents etc) exceed its likely much-reduced revenues. Estimating that capital spending will exceed revenue by at last $200m on that side of the Budget, Mr Pinder added: “You’re going to be looking at a borrowing requirement that, in my view, will exceed $1bn.

“What I really think is going to be eye popping is when you check the debt-to-GDP ratio in the next 12 months. You may be looking at a debt-to-GDP ratio that is on the cusp of or exceeding 100 percent.”

This is because The Bahamas’ national debt, pegged at around $8.4bn, will surge by around $1bn over the next 12-13 months while GDP contracts by an even more staggering amount. The Prime Minister recently said Bahamian GDP could shrink by between 15 percent to 20 percent, meaning the economy’s output for 2020 could plunge by around $2bn compared to the prior year.

Data from the Department of Statistics pegged Bahamian GDP in 2018 (last year’s figures are not yet available) at $12.424bn in current prices, and $10.763bn when measured using their real equivalent. The latter measurement strips out the effect of inflation. A near-$2bn contraction would take GDP below $10.5bn in current prices, and to $8.763bn in real terms.

With the Government’s debt (including liabilities guaranteed on behalf of the public corporations) likely to be around $8.8bn-$8.9bn at June 30 this year, based on its own projections, Mr Pinder’s estimated borrowings/deficit size would take this to around the $10bn mark by mid-year 2021 - well within range of his 100 percent debt-to-GDP ratio.

The Government has already confirmed that revenues were down 50 percent year-over-year for March, which is typically its richest income month, and should that trend continue for the full fiscal year it could lose as much as $1.2bn in revenue over the next 12 months based on its post-Dorian fiscal forecasts.

Mr Pinder, though, warned that neither the Government nor the Bahamian people can solely blame Dorian and COVID-19 for the nation’s fiscal woes. “This was a problem created over a number of years,” he told Tribune Business.

“We continuously expanded the civil service, we continuously borrowed to finance fiscal deficits even when we introduced VAT to mitigate against some of that. All these things have really done is expose the cracks that were already in the foundation.”

The UoB economics lecturer also voiced fears that that S&P’s and Moody’s recent actions had further worsened the economic pressure on The Bahamas. “One of my concerns is that given what’s happening is there going to be a loss of investor confidence and monies taken out of the country?” he queried.

“I want to be very careful in going out on a limb in saying that publicly, but again it’s a very difficult position. We have a downgrade of The Bahamas’ sovereign debt at the time we have these Budget challenges, and the downgrade has not only affected interest rates on our foreign currency borrowings but can have an impact on foreign direct investment.

“Investors look at these things as they do assessments of country risk, and in terms of being able to repatriate profits.”

Summing up the importance of tomorrow’s Budget for The Bahamas’ immediate, medium and long-term future, Mr Pinder said: “This Budget is a defining one for the country. In my view it’s almost like an inflexion point, and almost a watershed moment for the country.”