The Tribune

• Economist fears future external reserve pressure

• As foreign currency debt hits $4.8bn at 2020 end

• Trend ‘unsustainable’ as servicing costs increase

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamians should “absolutely be concerned” about foreign currency borrowings rising to almost 45 percent of the near-$10bn national debt, a local economist warned yesterday.

Rupert Pinder, who lectures at the University of The Bahamas (UoB), told Tribune Business that the almost-$4.8bn in foreign currency debt owed by the government threatens to impose growing pressures on the country’s external reserves and major industries that have been devastated by COVID-19.

While acknowledging that the government had little choice but to finance the majority of this fiscal year’s $1.327bn deficit in US dollars, given the urgent need to support the external reserves with tourism and other major foreign currency-earning sectors shut down, Mr Pinder said this short-term gain could result in longer term pain if the economy does not rebound strongly.

Increased foreign currency debt means The Bahamas must rely ever more heavily on growing its tourism earnings to service these obligations, otherwise the external reserves could be depleted by rising repayment costs.

Warning that this nation’s current debt trajectory and metrics are “unsustainable”, Mr Pinder added that the government faces higher interest rates and less “flexibility” when it comes to servicing its foreign currency debt as opposed to the Bahamian dollar equivalent.

“It’s really a concern to the extent it reduces your flexibility,” he told this newspaper of the sharp increase in The Bahamas’ foreign currency borrowings, which have risen rapidly in recent years as a proportion of the total national debt to hit 44.7 percent at year-end 2020.

This means that the government’s foreign currency debt is close to matching the size of its Bahamian dollar equivalent, having expanded by a net $635.2m or 15.3 percent during the final three months of 2020 due to the placement of $825m in international bond issues.

“I’m sure that the Ministry of Finance argument would be that a lot of this borrowing was because of COVID-19 to support the external reserves given the overall fall-off in foreign currency earnings,” Mr Pinder added.

“We can certainly debate, in terms of the reasonable reasons for the increase in foreign currency borrowing, but the long and short of it all is it’s not a sustainable position. Rising debt, as a percentage of gross domestic product (GDP), is always a concern, and some would argue in the context of our economy that any increase in debt levels ought to be a concern....

“Generally speaking, when you are carrying a disproportionate amount of foreign currency borrowings you have to consider the long-term ramifications for your foreign reserves. That debt has to be serviced from your foreign currency earnings. That is a concern.”

Mr Pinder spoke out after the Central Bank’s review for the 2020 fourth quarter revealed that The Bahamas’ foreign currency debt, which hit $4.784bn at year-end, now accounts for 44.7 percent of a near-$10bn national debt.

He added that the Bahamas’ foreign currency debt servicing costs have increased significantly due to Moody’s and Standard & Poor’s (S&P) downgrading the country’s sovereign creditworthiness, which will further ratchet up the pressures on the external reserves and tourism earning inflows to meet investor repayments.

“We have to consider the cost of money, the interest rate,” Mr Pinder told Tribune Business. “This is all taking place against the backdrop of an increase in interest rates as a result of the downgrades of our sovereign debt. Therefore, we are faced with higher interest rate costs compared to periods in the past.

The Government’s last two international bond issues, of $600m and $225m, attracted interest rate coupons of 9.25 percent and 8 percent respectively - both much higher than the 6 percent paid on the capital raise that preceded them in late 2017.

While The Bahamas has the ability to lower interest payments on its domestic debt via restructuring or rate cuts, Mr Pinder argued it does not enjoy this luxury with the Government’s foreign currency borrowings.

While backing the policy that has seen the Central Bank report record $2.4bn in external reserves amid COVID-19, he added that the rising foreign currency debt servicing demands could be storing up pressures and difficulties further down the road if tourism and the wider Bahamian economy do not strongly rebound from the pandemic.

With John Rolle, the Central Bank’s governor, predicting that economic and tourism performance may not match or exceed 2019 levels until 2023, Mr Pinder told this newspaper: “When you look at this against very anemic growth and the slow rebound of tourism earnings, we have to be absolutely concerned about the amount of foreign currency debt servicing in that environment.

“The increase in foreign currency debt, even in the best of times, and even in the absence of a pandemic, would be a concern, and in this environment there will be an increased level of concern. Foreign currency debt has been on the rise for quite some time in terms of its share in proportion to local currency debt.

“A lot of the foreign currency borrowing, in some instances, was not used for investment or capital expenditure but really to maintain recurrent expenditure. A lot of that stuff is used for imports; for non-capital purposes. That’s entirely different when you’re borrowing for capital projects that yield returns in the future.”

The Central Bank, in dissecting The Bahamas’ national debt at year-end 2020, said: “A breakdown by component showed that Bahamian dollar obligations constituted 55.3 percent of the total, while foreign currency liabilities accounted for the remaining 44.7 percent.”

The regulator found that the nation’s foreign currency debt rose by $635.2m (15.3 percent) to $4.784bn during the 2020 fourth quarter. “In comparison to the same quarter of 2019, total foreign currency debt service payments rose sharply to $340.5m from $79.7m, attributed in large part to a $248m refinancing of Government’s short-term external debt obligations,” it said.

“Net of the refinancing, the comparable serving was still expanded at $92.5m. Underlying this outturn, the Government’s debt service payment increased to $321.5m from $58.1m last year, as amortisation payments advanced to $254.3m and interest charges moved higher by $16.8m to $67.2m.”

Pointing to the impact this is having on the Government’s finances, the Central Bank added: “Exclusive of refinancing activities, the Government’s debt service to revenue ratio stood at 18.3 percent at end-December, an increase of 7.6 percentage points over the previous year, while the debt service ratio rose to 41.8 percent from 8.4 percent in 2019.”