By NEIL HARTNELL
Tribune Business Editor
nhartnell@tribunemedia.net
The Government may be reaching its debt limits given that such liabilities are now bigger than the economy, the Debt Advisory Committee’s head warned yesterday.
James Smith, former minister of state for finance in the first Christie administration, told Tribune Business that The Bahamas current debt-to-GDP ratio of 100.4 percent is “not a comfortable place to be” as he prepares to advise the Government on how to manage and reduce its $10.356bn stockpile of liabilities.
“We might be reaching our ceiling when we have debt at the level of GDP. It’s not a comfortable place to be,” he conceded. “It’s the quantum of the debt and the tenor of the debt that we have to look at, and the way forward would be to manage the debt by setting some objectives, but we wouldn’t know that until we get the committee formed and get a fully comprehensive background on it.”
While the economy’s rebound will increase output and gross domestic product (GDP), thereby likely taking the debt ratio back below 100 percent, this will likely remain elevated in the high 80 percent to 90 percent-plus range for some time to come given the blow-out produced by Hurricane Dorian and COVID-19 that further accelerated The Bahamas’ fiscal deterioration.
Mr Smith, meanwhile, said the Debt Advisory Committee and the Government cannot focus solely on the latter’s debt burden and associated servicing costs given that there are multiple impacts on the wider economy to consider.
He added that the Committee would first need to come to grips with, and gain an understanding of, issues such as how much of the Government’s debt is denominated in foreign currency as opposed to Bahamian; whether there are any “balloon payments” attached to specific issues; the flexibility of creditors and lenders; the split between long and short-term debt; and the tenors and maturities for every debt tranche.
“The debt itself, and the servicing of the debt, is dependent on the economy, which is really then reliance on tourism where we get most of our foreign exchange earnings from,” Mr Smith told this newspaper. “Those earnings go not only to pay debt but pay for imports.
“We cannot only look at the debt but the economy, and particularly the demand for foreign currency settlements. If the Government is going to use a certain amount of foreign currency inflows to pay its debt, it also need to look at what the importing sector needs to keep the economy going. That’s not just goods and services, but intermediate products.”
Mr Smith said such considerations, namely not crowding out the private sector and critical foreign exchange, “go beyond what you might see in a developed country” with a convertible currency and floating exchange rate.
The Bahamas, though, has a non-convertible currency, but the former finance minister argued that the one:one fixed exchange rate peg with the US dollar had served the country well and needs to be maintained.
“It’s very helpful for the tourism sector,” Mr Smith said. “It gives certainty, and in any economy you need confidence in the value of your currency and exchange rate, that it’s the same next week or next month, otherwise people and tourists start hedging.
“We need to look at all the metrics; where we have come from, where we are now and where we want to go in the future. We may want to set a fiscal target for revenue to GDP. But we have to do it in such a way that we’re able to minimise any impact on the wider economy, the real economy.
“We can fix debt servicing in a very short period of time, but would disrupt other sectors of the economy.” The Prime Minister himself last week said he wants government revenues to be equivalent to 25 percent of Bahamian GDP by the time his administration’s term in office ends, while the Fiscal Responsibility Act mandates the Government adhere to deficit and debt-to-GDP targets.
Mr Smith, meanwhile, said the Committee and administration also have to ensure The Bahamas’ debt woes do not drag down this nation’s post-COVID recovery while being mindful of global impacts such as the supply chain disruption and rising energy costs.
“In terms of the [COVID] crisis we might have passed that,” he added. “What we’re looking for now are more positive signs in the economy, and signs of the return of more tourists, which bring you more revenue to apply not just to debt servicing but other costs of the economy. You have to keep an eye on the re-opening of the economy as well.”
John Rolle, the Central Bank’s governor, yesterday said the $75m, one-year Bahamas Government Registered Stock bond offering that closed last Wednesday was “substantially oversubscribed” although he provided no figures.
This will likely have come as some relief to the Government after what one institutional money manager, speaking on condition of anonymity, described as a “wake up call” when just $12m of the previous $30m bond - which was issued in August - was picked up by the market. The Central Bank picked up the $18m balance.
Mr Rolle, addressing the Central Bank’s third quarter economic briefing, said: “The size of the public sector’s net borrowing requirements, and the stimulus impact of such government expenditure, still require a prudent mix of deficit financing in Bahamian dollars and foreign currency.
“Although this optimum is shifting more towards domestic currency financing, it still maintains a requirement for significant foreign currency funding in the mix, and this informs the consultative process that is maintained between the Central Bank and the Ministry of Finance.
“Nevertheless, our near-term outlook does tolerate some reduction in the reserves for justifiably increased domestic financing of both public and private sector investments.... From a monetary policy perspective, the Central Bank is taking a more relaxed position concerning protection of the Bahamian dollar currency peg, and is accommodative to increased domestic financing of both the public and private sectors.”
Comments
John 3 years ago
When government debt increases it will eventually cause the standard of living of the people in that country to decline. As the debt increases government must now allocate more and more of its revenue to servicing debt so less and less goes towards providing goods and services and may also have to increase taxes to help raise revenue. Some goods and services may not be available and inflation due to increased taxes may make many goods and services unavailable to the general population. The fact is that many of the more affluent countries of the world find themselves in this situation. Some are not worried about paying existing debt but continue to borrow money for the country to function. But eventually somewhere in the near future there is a financial cliff or a brick wall that it may be near impossible to bounce back from. Some feel the US economy will be among the countries that experience a financial collapse and the US dollar will become irrelevant in the international market. Obviously if The Bahamas continue to hang on tourism for life support then the story is already told. A country that supplies very little of its food will have very little options.
Dawes 3 years ago
He added that the Committee would first need to come to grips with, and gain an understanding of, issues such as how much of the Government’s debt is denominated in foreign currency as opposed to Bahamian; whether there are any “balloon payments” attached to specific issues; the flexibility of creditors and lenders; the split between long and short-term debt; and the tenors and maturities for every debt tranche. Umm should the Central Bank and Ministry of Finance not have this information available at the click of a button? Or is this something that will take 6 months to a year to work out so this next committee can pretend to be working?
sheeprunner12 3 years ago
Old Jimmy has to find something to say. Every Committee has to appear to be active. The horse is already out the gate ....... Jimmy maybe an hour late. We all saw this coming since the 2000 OECD ultimatum and definitely since the 2008 financial crisis. Only our politicians seemed to have been ostriches.
realitycheck242 3 years ago
If people like James Smith who help caused this depth problem under the Christie administration would retire and let the new brilliant qualified minds in the Bahamas take on the challenge of solving our depth problem, maybe we would get positive results. This country needs to stop pouring old wine in new skins and expecting an solution based result
ThisIsOurs 3 years ago
"debt"
tribanon 3 years ago
Bingo!
Sickened 3 years ago
"John Rolle, the Central Bank’s governor, yesterday said the $75m, one-year Bahamas Government Registered Stock bond offering that closed last Wednesday was “substantially oversubscribed” although he provided no figures."
I'm glad that the numbers criminals are now buying up government debt - now that they are running tings.
Bonefishpete 3 years ago
Nothing will happen until the Bahamian Dollar falls below the US Dollar. Look to Jamaica to see your future.
John 3 years ago
There’s much more behind the devaluation of the Jamaican dollar than the economy. It was done because Jamaica refused to cooperate in America’s FAKE ‘war on drugs.’ And there are some strong benefits from Jamaican dollar being devalued.
Lil242 3 years ago
I don't believe a word these clowns saying, government bonds are already trading at distress levels all the ingredients are in place for a default in the near term. Now they going around to these local lending institutions begging to borrow money; who believing their pretty speeches that's filled of lies the private sector ain't dumb. These lending institutions know a government default is coming soon. Economic growth dnt make me laugh before Dorian and Covid-19 this country had negative GDP growth for decades; am tired of the lying politicians and civil servants. I listen to private sector for the truth not politicians, the private sector don't need votes every 5 years. We will be just like Jamaica in short order is correct.
Maximilianotto 3 years ago
Which „metrics“? B$ devaluation is the only solution. Committes are the best way to dilute responsibility to zero. The Cliff is nearing. Let’s wish the best to our new administration. So far, no hard facts presented. Time is running…everyone knows.
John 3 years ago
Much of what happens in this economy will depend on how effectively Joe Biden is able to manage the US economy and , in the more distance, what happens in China that is also in a financial crisis and facing a possible collapse of its economy. Currently there is no recession! In fact the US and many countries around the world are facing a shortage of workers and a shortage of goods and services. This is leading to increasing wages and also increasing costs of goods and services. This is good in the short term and The Bahamas most be strict, quick acting and focused on fixing its debt problems in the short term. This will be even more achievable if Joe Biden gets his stimulus and restructuring programs going. More money will flow and people will spend more. Tourism will boom. But eventually the economy will burn up as inflation spirals out of control. Or if the bottom falls out of the Chinese economy. By this time, which can be a matter of months to a year, The Bahamas should not only have fixed its debt problem, but increased its ability to grow and supply food. The energy supply should have been stabilized and rates secured for another several years. Bahamians should be advised against overspending during the boom, that will be short lived. In fact they should be encouraged to be frugal and continue to grow some of their own food.
Maximilianotto 3 years ago
The IMF will fix the debt problem same time introducing frugal living standard. Nothing else will work.
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