The Tribune

• Economist challenges foreign borrowing scale

• Nation needed to ‘straddle fence’ on COVID

• Extended lockdowns ‘brought us to our knees’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas should have “found a way to walk and chew gum” earlier in the COVID-19 pandemic so as to minimise its foreign currency debt hike, an economist argued yesterday.

Rupert Pinder, who lectures at the University of The Bahamas (UoB), told Tribune Business that while the external reserves needed support amid last year’s tourism shutdown he was still questioning whether “such a big build up of foreign currency debt” was necessary if the country had struck a better balance between re-opening the economy and COVID controls.

The Bahamas’ foreign currency debt increased by $1.3bn in the year to end-June 2021, according to Central Bank data, and Mr Pinder said: “I think one of the concerns was really in terms of the foreign currency debt. When tourism was pretty much shut down, to stabilise your foreign reserves it was felt there was a need to increase foreign currency debt.

“I still question whether there was a need to have such a big build-up of foreign currency debt. I was not a big proponent of the increase in foreign currency debt. To be honest, I felt all along that we should have found a way to walk and chew gum, and extend that long-term.”

The Ministry of Finance’s Public Debt Bulletin, released on Monday night, pegged the foreign currency share of The Bahamas’ total public sector debt stock at just under 42 percent at end-September 2021.

“External indebtedness at $4.778bn constituted 41.8 percent of the total debt stock at end-September 2021, which was below the 42.5 percent stake at end-June 2021 but exceeded the comparative year-earlier of 37.3 percent,” the report said.

“The central Government’s debt stock totalled $10.087bn at end-September, representing respective gains of $151.7m from end-June 2021 and $1.183bn from end-September 2020.The latter change included the $825m international bond issue, several new loan facilities from the multilateral agencies and a commercial credit.

“The outstanding debt equated to an estimated 98.1% of GDP(gross domestic product) at end-September 2021, down slightly from an estimated 100.5 percent at end-June, but considerably above the 84.3 percent in the year-earlier comparative period,” it added.

“External debt at end-September 2021, of $4.353bn, accounted for 43.1 percent of the central Government’s debt portfolio - a net decline of $15.7m from end-June 2021 and the slightly higher share of 44 percent. During the reporting quarter, the Government had drawings of $23.7m against existing foreign currency facilities.”

Mr Pinder’s argument is that had The Bahamas struck a balance tilted slightly more towards an earlier re-opening of the economy, the foreign currency borrowings over the past year may not have needed to be so excessive to support the reserves and the one:one currency peg with the US dollar.

This would have required an earlier tourism re-opening, given the sector’s importance to the overall Bahamian economy, but Mr Pinder and others have long argued that heavy foreign currency borrowing stores up potential problems in later years due to the pressures it imposes on the external reserves and export-earning sectors to generate inflows to service debt repayment.

“In the early stages we were pretty much in line with what other countries were doing as we were in uncharted territory,” the Bahamian economist said of the pandemic response, “but I feel that the constant lockdowns brought us to our knees and we needed to find a way to straddle the fence there.

“One of the luxuries we don’t have as a small country is that we don’t have the ability to print money. The US, UK and larger countries can stimulate their economies by printing money. We don’t have that luxury. We don’t have a currency that’s convertible, tradeable. That limits your options.

“I felt as a small economy we had to find a way to straddle the fence by allowing some commercial activity while controlling the pandemic. I felt we should not have gone into an extended lockdown for a lengthy period of time. As a result, we had a massive increase in foreign currency debt.”

The July-October period in 2020 was punctuated by various lockdowns and associated COVID restrictions, with the tourism industry only properly re-opening in November - almost exactly one year ago.

“It was too late,” Mr Pinder argued. “They [the Minnis administration] had kind of a moment where it was recognised we could not have these extended lockdowns because of both the build-up in foreign currency debt and the failure of businesses.

“We had to find a way to manage the situation while maintaining some level of commercial activity, and it would have been helpful if this was done even earlier.” The Davis administration has been seeking to reduce The Bahamas’ reliance on foreign currency borrowing since taking office, instead wanting to tap the $2.4bn in surplus liquidity held in the domestic banking system.

It has also pushed back the $700m foreign currency bond issue, which was planned by the former administration, until the second half of the 2021-2022 Budget year. But, with more than $2bn worth of debt maturing and coming due for payment in the next eight months to end-June 2022, Mr Pinder said the Government had little option but to refinance or rollover this sum.

Of the $2.078bn in debt principal due to mature over this period, the vast majority - some $1.908bn - is held by domestic investors such as banks, pension funds, insurance companies, mutual funds and other institutional investors.

This will make it easier for the Government to refinance or rollover the existing debt with new bond issuances, given that $1.516bn or just under 75 percent of that $2.078bn is held in local securities. Just under 10 percent of the Government’s total debt stock, some 9.5 percent, is due to mature within the next year.

The Davis administration may also seek to offer extended maturities on any new debt issues in a bid to spread out repayments, although investors are shying away from long-term paper because of the perceived greater risk associated with investing in government securities. Appetite is also thought to be low because many are at their regulatory or prudential limits on such holdings.

“The good thing is that domestic debt gives you greater flexibility to refinance, rollover etc,” Mr Pinder said. “At least they have some flexibility there. You cannot afford to make $2bn in repayments. You have to rollover or refinance. There’s no alternative.”