The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank’s governor yesterday warned that US interest rate hikes could “frustrate” the Government’s fiscal consolidation plans by increasing its foreign currency borrowing costs.

John Rolle, speaking as the Central Bank unveiled its 2021 fourth quarter and full-year economic developments assessment, warned that the US Federal Reserve’s efforts to fight inflation could have consequences for The Bahamas’ efforts to refinance existing foreign currency debt as well as new borrowings.

The US central bank is expected to raise interest rates on up to four separate occasions in 2022, hiking borrowing costs by 25 basis points or 0.25 percent each time. The Central Bank governor yesterday described this as one of the “downside risks” facing the Bahamian economy this year given that it could also negatively impact vacation demand by Bahamian travellers.

“While pent-up demand for vacations is a still a strong component in the tourism recovery, the US central bank’s response to raise interest rates to fight off inflation could erode some of this momentum,” Mr Rolle warned.

“It could also frustrate the Bahamian fiscal consolidation efforts by increasing costs on new or refinanced foreign currency debt. That said, the opportunity remains for other reforms to strengthen the Bahamas’ sovereign risk assessments and tackle existing interest spreads on foreign currency debt.”

The Bahamas, according to the Government’s just-released Medium-Term Debt Management Strategy, has some $309.5m worth of foreign currency debt coming due for principal repayment in 2022, and which may need to be refinanced and rolled over. A further $293.4m comes due in 2023, and this figure is set to peak at $514.4m in 2024.

This means more than $1bn in foreign currency debts will potentially have to be refinanced at higher borrowing costs over the next three years if US interest rates are hiked. And this will only add to a taxpayer debt servicing burden that is projected to rise further over the next five years, jumping from $482.5m in 2021-2022 to $567.6m in 2025-2026.

Mr Rolle, though, said The Bahamas also has “the opportunity to chip away” at the decline in its sovereign creditworthiness - stemming from multiple downgrades by Moody’s and Standard & Poor’s (S&P) - by reversing the post-Dorian and COVID fiscal slippage, and regaining the confidence of its lenders and creditors.

“The Bahamas and emerging market countries on the whole, which borrow in US dollars through the US credit markets, as interest rates in the US increase that is going to pass through and put pressure on the cost of borrowing in US dollars,” the Central Bank governor explained.

“It could have some impact on the cost of borrowing for The Bahamas because that increases the costs of new financing and the need to refinance any debt. The Bahamas is also in a position over the next few years where we have the opportunity to chip away at our sovereign credit rating.”

That rating is at so-called ‘junk’, or non-investment grade, status with both Moody’s and S&P, and will take some time to improve. However, Mr Rolle said efforts in this area are “one of the most important” components of any government debt management strategy and efforts to reduce the costs associated with The Bahamas’ US dollar borrowing.

Turning to the Government’s just-published Fiscal Strategy Report, he added: “The most important thing that the Government articulates in its fiscal strategy, aside from the forecasts of where it expects to be, are the tools and strategies it expects to use to achieve that outcome for The Bahamas.”

Besides slashing the annual fiscal deficit and debt burden, Mr Rolle said the Government must “take active measures to save more of its revenue collection and to improve its revenue collection efforts”.

He added: “These kinds of messages come across from the Fiscal Strategy Report, and these are important messages that the Government has to be sending. There will be debate and discussion on the level of effort channelled by these measures.

“First of all, we need to identify the positive intent that gives more positive outcomes for the debt and deficit burden. Those outcomes in The Bahamas depend on additional measures beyond growth in the economy because we have a stock of debt, the level of which we are trying to reduce over the medium and long-term, and that’s where revenue enhancement and expenditure cuts become very important.”

Mr Rolle acknowledged that domestic inflation, as much as what is occurring in the US, will also impact the Bahamian economy in 2022. He said: “Increased inflation which, although not an outsized concern, could boost the import bill and consume a greater share of foreign exchange earnings.

“Likewise, COVID-19 is still an uncertainly, both in terms of uneven access to vaccines at the international level and domestic factors that also weigh on the travel sector assessment of the safety of vacationing in The Bahamas.

“Where necessary, the Central Bank remains well positioned to respond to shore up the adequacy of foreign reserves and support for the Bahamian dollar fixed exchange rate... The Central Bank also expects the environment to be less reliant on government financing in foreign currency, as private sector inflows continue to strengthen.”

Mr Rolle said the economy would in 2022 benefit from a full year of uninterrupted re-opening, adding: “In summary, the outlook is for stronger growth in 2022 as the calendar year impact of the economy’s reopening takes hold. Elements of rebuilding are also expected to maintain growth above average in 2023, though less accelerated than in 2022.”