The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas must "stop relying on its good fortune" and US proximity to reverse its downgrade spiral and recover its economy from COVID-19's clutches, a top banker has warned.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business in the wake of the latest downgrade by Standard & Poor's (S&P) that The Bahamas must demonstrate there is more to its game than simply depending on its northern neighbour.

He argued that present and future governments "have to stop relying on proximity and our good fortune when America does well" to drive this nation's economic growth, job creation and fiscal performance.

"We have to be very deliberate in demonstrating we have our own policies, own strategy...," Mr Bowe said. "We have to stop relying on good fortune and instead rely on our intelligence, competence and ability we have, but which I don't think we demonstrate sufficiently."

S&P's latest downgrade, from 'BB' to 'BB-', pushed The Bahamas further into so-called 'junk' territory. The repercussions are likely to include the Government having to pay more in terms of higher interest rates when it borrows on the international capital markets, a cost that will be borne by Bahamian taxpayers, who already face an 8.95 percent coupon on the latest $600m bond.

The Bahamas' reduced sovereign creditworthiness also means this nation's country risk will have increased in the eyes of investors, with the consequence likely to be greater demand for tax breaks and subsidies by sponsors of major development projects.

While emphasising that he is not suggesting The Bahamas is going bankrupt, Mr Bowe argued that the country ought to adopt the posture of a company seeking Chapter 11 bankruptcy protection from its creditors and develop a credible restructuring plan to satisfy both them and the judge (playing the role of S&P and Moody's).

"What it does signal," he added of the downgrade, "is we've not demonstrated sufficiently to them [S&P] that there's a specific and purposeful plan to address what is the intervention and material fall-out of the COVID-19 pandemic and what was Hurricane Dorian.

"The Bahamas' recovery and economic fortunes will be in how we respond to the COVID-19 pandemic from a tourism perspective. We are caught in one of these vicious cycles that says when the economic environment around us is not bolstering our prosperity we have to be far more deliberate in the actions and policies we take and make."

S&P, in justifying the rational for the downgrade, said the latest $600m foreign currency bond had also increased The Bahamas' external debt. "Although external financing helped support The Bahamas' foreign exchange reserves, it raised the country's external indebtedness," it added.

"We expect the external debt of the public and financial sectors, net of usable reserves and financial sector external assets, will be about 117 percent of current account receipts in 2020. These figures include the government's $2.25bn in external bonds, but do not include the external debt and foreign direct investment in the islands' substantial tourism sector."

S&P continued: "Based on the gross external liabilities of the country's large banking sector, we expect the gross external financial needs of the public and financial sectors will be 352 percent of current account receipts in 2020, up from about 200 percent in 2019.

"This also reflects the high current account deficit, in part due to the significant decline in tourism receipts, and the financial sector's high rollover needs. However, we consider the financial sector's external assets highly liquid, which somewhat diminishes liquidity risk. Errors and omissions also contribute to a weak external profile. Errors and omissions have historically been high and tend to fluctuate."

Turning to monetary policy and the Central Bank, S&P said: "We expect that the Central Bank will continue to primarily rely on a combination of interest rates, moral suasion, and macro-prudential tools to influence domestic credit growth. The Central Bank has recently eased access to foreign currency and external financing for entities with foreign currency inflows to stimulate business activity.

"However, the limited nature of this measure and restriction to sectors that generate foreign currency should dampen the impact on the country's external accounts. Loss of correspondent banking relationships remains a risk for The Bahamas, as it does for many of the Caribbean sovereigns we rate.

"Although we do not believe that this trend will threaten the banking sector's ability to roll over its debt, we do think that it could further stress the financial system. We believe this highlights the importance of the Central Bank's new anti-money laundering/counter-terrorist financing supervision regime, which should strengthen compliance and assist in the maintenance of the system's correspondent banks."

"We consider banking sector contingent liabilities limited, given the size of the sector, with assets estimated to be about 136 percent of GDP. The financial sector is dominated by foreign subsidiaries of Canadian banks, which comprise about two-thirds of domestic assets," the rating agency added.

"At the onset of the pandemic, the commercial banking sector as a whole had strong capital and liquidity ratios. Nevertheless, the severe external shock could erode the asset quality and profitability of those banks exposed to the tourism sector, particularly as banks work to resolve the forbearance offered to borrowers at the onset of the pandemic."