The Tribune

• Governor: Nation must ‘mature’, make tough reforms

• Central Bank waives premium on Gov’t overseas bonds

• Nation not facing ‘sovereign debt distress’, he asserts

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank’s governor yesterday warned The Bahamas “may never be ready” for the total elimination of exchange controls, adding: “I’d like to get to the Indy 500 but some of us aren’t even on Carmichael Road.”

John Rolle, answering questions at a forum staged by The Bahamas Think Tank, said reaching that position was unlikely “until we mature and face up to the difficult financial reforms we need to embrace”. He added that the level of “sophistication” in Bahamian financial markets and the economy will also need to be significantly enhanced.

“It’s not on the immediate horizon,” he replied, when asked about the prospects for completely eliminating The Bahamas’ exchange control regime. “It’s not as straightforward as throwing a switch. What we try to emphasise is that behind the system is a framework to maintain the stability of the currency.

“How do you maintain that stability, and the stability of the financial system, when we remove exchange controls? Until we mature, and face up to the difficult financial reforms we need to embrace, we may never be ready. There are difficult reforms that need to take place, and even then we may run into a barrier with the level of sophistication of the economy and financial markets.”

Mr Rolle did not specify the “difficult financial reforms” that The Bahamas will require to facilitate complete exchange control liberalisation, although he indicated that the Central Bank will continue with the gradual, phased liberalisation that it was pursuing prior to the COVID-19 pandemic.

“In the interim we can manage exchange controls so that they can be tweaked to facilitate more savings and investments, but still be very careful how we expose ourselves to speculative pressures that we cannot control,” the Governor added. “Like you, I’d like to get to the Indy 500 but some of us are not on Carmichael Road. Until we improve the road on implementing reforms, it remains a highway we cannot reach.”

Mr Rolle’s cautionary comments came on the same day that the Central Bank unveiled “a temporary waiver” of the 5 percent investment currency market (ICM) premium to facilitate investments by Bahamas-based institutional and retail investors in the Government’s foreign currency bonds that are largely US dollar-denominated.

The easing, which came just hours before Moody’s again downgraded The Bahamas’ sovereign creditworthiness, was said to have been made in response to increased local investor interest in acquiring the Government’s foreign currency debt securities.

“The Central Bank of The Bahamas wishes to announce the temporary waiver of the Investment Currency Market (ICM) premium for resident investors (including entities) applying to invest in Bahamas Government bonds denominated in US dollars, and currently trading in the international capital markets,” the Central Bank explained of the rationale for such a move.

“The ICM premium of 5 percent associated with purchases of foreign currency for these specific portfolio investments is being waived for a limited period.” The regulator did not provide a date for when the waiver will end, adding that it would be determined by local investor interest and demand.

“The Central Bank will monitor aggregate investor interest to determine a future cut-off point for this accommodation,” the Central Bank added. “The Central Bank has seen increasing investor interest in purchasing the Bahamas government instruments.

“After consultation with the minister of finance [Philip Davis KC], it has been decided that applications to facilitate such transactions will be approved at the official market rate by the Bank. The waiver of the ICM premium on outflows would preclude any approved transactions from the partial ICM premium rebate on the capital on the liquidation of the investment and repatriation of proceeds to The Bahamas.”

The easing will, in theory, enable Bahamas-based investors to benefit from the greater returns on the Government’s foreign currency bonds through their higher interest rates and yields compared to Bahamian-dollar denominated debt. And, in turn, the move will expand the pool of investors purchasing the debt thereby increasing demand for government paper.

Mr Rolle’s comments, and the Central Bank’s move, coincided not only with the Moody’s downgrade but repeated questioning of the Central Bank governor by Sir Franklyn Wilson, the Arawak Homes and Sunshine Holdings chairman, over why the Government is paying between two to three percentage points more in interest rates than privately-owned Bahamian companies for its debt financing.

Arguing that the reverse should be true, Sir Franklyn said: “I genuinely believe it’s in the best interests of the country to understand how the Government debt can be in a situation where the Government of The Bahamas is paying at least two percentage points; two to three percentage points more than anyone. Why should the Government be paying that?” He pointed to a pension fund that lent money to a unnamed private business at an interest rate of 4 percent.

Mr Rolle, replying to this and other questions, asserted: “The Bahamas does not have a sovereign debt crisis. We’re not in sovereign debt distress. The Government has incredible leeway and flexibility to raise revenues if it needs to.”

He also challenged Sir Franklyn and others to effectively put their money where their mouth is through investing as individuals in Bahamian-denominated government securities. “A government acts if it needs to act. If it needs to strengthen the confidence of lenders, and some of it is perception, it engages with the lenders. Some of that is happening, and we are seeing some of that recently in the domestic market in increased interest in purchasing instruments.”

Mr Rolle, confirming that the Central Bank continues to work on developing a savings bond “for the small man to invest in government instruments, added that individual retail investors also “collectively need to be more visible in that space” as opposed to relying almost wholly on institutions to purchase every government bond or Treasury Bill issue.

“We have to demonstrate our confidence to get out there and buy into government instruments,” the Governor added.

The Bahamas’ fixed exchange rate regime and the associated capital controls currently preserve the one:one peg with the US dollar. The Central Bank, prior to COVID, had embarked on a gradual easing of exchange controls designed, in particular, to facilitate overseas investments by Bahamians in productive assets such as stocks and real estate.

The peg, which has existed since 1973, is generally seen as having served The Bahamas well thus far, but several in the private sector have privately voiced frustration to this newspaper over what they view as a too-conservative policy.

Their argument is that a fixed exchange rate regime is anachronistic, and out of place, in a world where capital is increasingly allowed to flow freely across borders - especially with the continued digital assets evolution. They view faster, and greater, liberalisation as critical to spurring greater Bahamian and foreign direct investment (FDI) in this nation, providing the private sector and productive economy with greater access to capital.