The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Credit to the private sector continued its “long-term decline” during the COVID-19 pandemic to drop below a sum equivalent to 50 percent of GDP, Moody’s has revealed.

The credit rating agency, in its just-published full country analysis on The Bahamas, highlighted the increasing difficulties companies and individuals are facing in accessing loans by disclosing a more than 15 percentage point slump in total outstanding credit over the past decade - a trend that further worsened due to the fall-out associated with COVID-19.

“Credit to the private sector has been on a long-term decline for years, with credit to the private sector falling from around 65 percent of GDP (gross domestic product) in 2010 to around 50 percent by end-2019,” Moody’s said. 

“The IMF credits the contraction in credit to more stringent lending standards, a low-growth environment keeping demand for credit low, and overall more caution from banks. This trend persisted in 2020 and 2021, with total outstanding credit in June 2021 flat relative to December 2020, and 4 percent below that of December 2019.

“Private sector nonperforming loans (NPLs) were 9.5 percent of private sector loans as of June 2021. According to the Central Bank, the loan deferral programme [it] authorised in 2020, which allowed deferred loans to not be classified as non-performing, is now almost completely concluded.”

Moody’s added that when it came to domestic demand, “private consumption and investment have been very volatile, weighed down by high rates of unemployment (exceeding 10 percent in 2019), households’ debt overhang and tighter lending policies.

“The contraction in credit coincided with a rise and then drop in the non-performing loan ratio, which peaked at 16 percent at year-end 2014,” the rating agency continued. “Banks have reacted to the rise in non-performing loans. In June 2021, the ratio of arrears to provisions was 75 percent, while the ratio of non-performing loans to provisions was 112 percent.

“The banking sector remains well capitalised, with the capital adequacy ratio reaching 31 percent at year-end 2020,  well in excess of the regulatory requirement of 17 percent. Liquid assets made up 32 percent of total assets last year.

“Banks are deposit-funded and have limited exposure to wholesale and inter-bank funding. Foreign-currency lending by onshore banks is restricted to domestic borrowers who generate foreign-currency revenue, such as hotels.”

As for the Government’s fiscal position, Moody’s added that the significantly elevated borrowing requirements sparked by the twin devastating impact from Hurricane Dorian and COVID-19 had seen the debt taken on more than double as a percentage of The Bahamas’ GDP or economic output.

“The coronavirus outbreak has led to a substantial increase in gross borrowing needs from historical levels of about 7 percent of GDP per year,” Moody’s said. “In fiscal year 2019-2020, the fiscal year ending in June 2020, gross borrowing requirements reached 13 percent GDP and peaked at 19 percent in fiscal year 2020-221.

“We expect them to average 12 percent of GDP over fiscal year 2021-2022 and fiscal year 2022-2023. The rise in borrowing requirements has led the Government to rely more heavily on the external capital markets, with the government issuing a 2038 bond for a total of $825m over two operations in October and December 2020.

“This was the Government’s first external debt issuance since 2017...... External bonded debt now accounts for 26 percent of total debt, compared to 14 percent in at end-2016. Market borrowing costs increased sharply in March 2020 as the coronavirus spread, but have since settled, albeit at higher levels than pre-pandemic,” it continued.

“The recent issuance and the decline in yields suggests that the Government retains market access, although at a higher cost than historically. External financing from multilaterals has also increased: The government plans to tap multilaterals for around $240m in funding, substantially higher than the multilateral financing received in pre-pandemic years.”

As for the Government’s access to domestic capital markets, Moody’s said: “Domestic financial markets have, in the past, provided significant financing. Domestic sources accounted for 69 percent of gross financing in the five years prior to the coronavirus pandemic. In addition, banks currently have substantial liquid assets, suggesting ample lending capacity.

“The Government, however, has only budgeted domestic sources to provide for around 50 percent of its gross borrowing requirements, and 25 percent of net financing needs, in fiscal year 2021-2022. It is unclear how much capacity the domestic financial system has to finance the Government.”