The Tribune

Any endeavour that does not seek answers and direction for improvement is but a frolic. The circumstances regarding The Bahamas’ fiscal affairs are far too important, and the issues much too critical, for us not to be actively looking for insights on how to move forward. In this regard, let us start where we ended part one. I stated: “Alongside the negatives [taken into account for the rating], every positive element has [also] been considered. The upside therefore must rest in reversing the negatives and improving on the positives.” It is evident that there is much to be done, but how do we do it? How can our policymakers move to achieve outcomes that are more positive? Are the improvements needed within our capacity? We will seek to tease out answers to the former questions. For the latter question, the answer is an unequivocal yes. It can be done if it is approached properly, respects the delicate trade-offs, avoids expediency and results in a sound suite of supportive policies and reforms that address the deficiencies of our economic and fiscal arrangements.

With this in mind, let us walk through the Moody’s 2022 report and consider the way forward. According to Moody’s, The Bahamas’ credit strengths lie in its “comparatively high level of GDP per capita”; “high policy predictability and a stable political system” and “favourable debt structure, which mitigates risks related to a sizeable debt burden”. The country’s sovereign credit rating, therefore, benefits from its high per capita income, which sits easily within the top five in the Americas, a perennially stable political system and a debt stock with well-staggered maturities. The latter point means less potential stress from extreme liquidity challenges when it comes to making capital repayments. The rating agency is convinced that The Bahamas will make the right policy decisions, or has extremely limited options, and will therefore make the right moves. These are important positives.

On the other hand, Moody’s sees the country’s obvious debt challenges in the form of “high debt and interest burdens”; “high dependence on tourism and low long-term economic growth prospects”; and “exposure to climate-related risks”. There is nothing here that we do not already know. The national debt is expected to peak above $11bn; annual interest payments are approximately $500m and counting; and we are all generally aware of what might happen if another hurricane should hit the country. The one aspect normal conversation does not always cover is the “low long-term economic growth prospects”. Over the long haul, Moody’s and others see the Bahamian economy continuing to grow at low rates. I believe that this is where the conversation turns and becomes exciting. Unlike debt and interest that cannot change overnight, every prediction on growth potential is based on what currently exits. Every new plan, policy change, intervention, investment or reform has the potential to change that positively. The first major take away, therefore, is that The Bahamas must find new ways to “urgently” influence its growth prospects, positively alter its economic outlook and shift the view on its forward-looking ability to manage the current debt stock without running into liquidity challenges. Both the public and private sector have a defined role to pay in this regard. We must innovate for better outcomes.

Any plans implemented now will, at best, only have mid to long-term impacts. The question is how any rating agency would consider this. Greater growth prospects mean easier affordability of interest payments and a potential change in the national debt’s growth trajectory. Therefore, any policy outcomes that support greater creditworthiness must attract a favourable reaction. According to Moody’s: “The implementation of fiscal and economic policies supporting a fiscal consolidation process that places government debt on a more durable downward trajectory would likely result in a return to a stable outlook. An improvement in debt affordability, which includes relying more on lower-cost domestic and external official sources of funding over more expensive external market issuance, could also support a return to a stable outlook.” The most obvious point here is that there is little possibility of an upgrade. Our focus must shift to the fact that downgrades are but symptoms of much larger issues.

Taking action that reduces debt; borrowing more funds locally at cheaper rates; and using cheaper external sources are critical components for the way forward. They are lynchpins for changing the economic outlook from a credit perspective. The actions needed are relatively clear. The challenge is, for example, whether the Government will be able to secure reasonable (quantum and pricing) funding in the domestic market? There are suggestions of reluctance in the local market to extend loans to government at the lower rates envisioned by Moody’s. However, if we are unable to bridge a portion of that gap locally, is it possible to contemplate that we will be able to blunt the stress of the current debt stock? Given the current global demand for debt, and our high per capita status, can we reasonably secure sufficient funding from multilateral agencies to change the debt profile?

Ultimately it is the ability to replace existing debt with cheaper loans that will have the most positive effect, followed later by an improved ability to retire them. Given the state of The Bahamas’ finances, the retirement of debt will likely only be possible via increased taxes, reduced spending or, more preferably, growth. There is also the possibility that local players will consider the fact that the Government (and country) need a real lever by which the debt burden can be reduced. Domestic market players might understand that such an action holds long-term benefits for the economy. It is possible there is an understanding that a rebalancing using domestic debt will improve the country’s debt affordability, reduce the costs of borrowing and positively influence The Bahamas’ economic outlook. In addition, maybe, just maybe, we are at the point where there is a recognition that our collective well-being is very dependent on our collective actions. It is my view that the Government alone cannot solve the current state of the economy without being disruptive.

The country has experienced many downgrades. Considering everything, with bonds yielding 10 percent-plus; approximately $4bn in loans maturing over the mid-term; the uncertainty of the COVID pandemic and the impact of the continued Russia-Ukraine war, another downgrade would be devastating. Moody’s indicates that such a downgrade “would be likely if a slower pace of fiscal consolidation contributes to tightening financing conditions and a rise in borrowing costs, which challenges the Government’s ability to finance fiscal deficits and maturing debt.” I strongly believe that as you absorb this statement, you will develop an appreciation of the need for urgent but careful debt management actions and finding ways to grow the economy.

At this moment, the deck is not stacked in our favour. There are the high inflationary pressures, spurred by the war and the impact that could have on disposable income in our tourism markets. The potential for a global recession is influenced by the war; lockdowns in China; rising incidents and concerns for COVID elsewhere. Energy costs are rapidly increasing. The country faces these stark realities. These are real threats to fiscal consolidation, and therefore exposure to the risk of downgrades. Consider the additional cost this will exert on The Bahamas. Consider the increased rollover risk. Consider the disruptive impact this would have, creating a need to ration resources and reduce spending on critical areas of the economy. This is why the case for targeting higher revenue-to-GDP is easily made, and explains why policymakers are exploring all options at this time. This is also one reason no entity or sector should contemplate taking actions that might jeopardise any aspect of the recovering economy. The circumstances are just too delicate now to take such chances. We are at a moment where every sector should be asking where we fit into the solutions.

It is hard to avoid the screaming headline generated from a credit downgrade, but how often do we stop to listen to the underlying whispers that created it? The Bahamas is rated Ba3, which places in a speculative category or, as some like to say, ‘junk bond’ status. How did we get there? As we search for insights into future resiliency and sustainability, let us examine the components of The Bahamas’ credit rating. ‘Economic Strength’ and ‘Institutions and Government Strength’ are rated ‘ba3’ and ‘ba2’, respectively. Combined, they determine the country’s ‘Economic Resiliency’, which was rated ‘ba1’. This places the country at the best end of the speculative class. ‘Economic Resiliency’, combined with ‘Fiscal Strength’, rated ‘caa2’, determines the ‘Government Financial Strength’, which displays a deterioration from the ‘ba1’ position due to very weak fiscal strength. Overall, The Bahamas is seen as weak, with the weakest link being the fiscal state of affairs. This clues us in on a few things. If the country is able to get to the surplus position projected by the administration, its fortunes will definitely start to change. The likelihood of getting there via growth is limited and therefore the need for other fiscal measures becomes highly possible. The possibility of a significant shock could place the country’s sovereign rating in unenviable company. We are at a point where forward thinking and aggressive action must be the order of the day.

The country is rated ‘Ba3’, the lowest of the speculative element class, but falls in a range that includes ratings two notches lower because of susceptibility to climate events. We have no control over the latter and must therefore focus on remediating ‘Government Financial Strength’. I draw attention to the fact that it is the much narrower capacity of what government is able to afford financially that is being measured, not the country’s financial strength. The credit rating does not reflect the country’s ability to afford debt but, rather, the ability of the Government given its current policies. The implications are clear. We must work collectively to change the national circumstance or be ready to cope with the alternatives.

NB: Hubert Edwards is the principal of Next Level Solutions (NLS), a management consultancy firm. He can be reached at info@nlsolustionsbahamas.com. He specialises in governance, risk and compliance (GRC), accounting and finance. NLS provides services in the areas of enterprise risk management, internal audit and policy and procedures development, regulatory consulting, anti-money laundering, accounting and strategic planning. Hubert also chairs the Organisation for Responsible Governance’s (ORG) Economic Development Committee. This and other articles are available at www.nlsolutionsbahamas.com.