The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas “must not get comfortable” with avoiding a further downgrade by maintaining its existing ‘junk’ grade creditworthiness with Standard & Poor’s (S&P), a prominent banker is arguing.

Gowon Bowe, the Clearing Banks Association’s (CBA) chairman, told Tribune Business that while there were no surprises in the credit rating agency’s Bahamas country report this nation has to “pay particular attention” to forecasts that its economy is set to return to historical growth rates that are unable to generate the jobs its people need.

S&P, in its analysis released late last week, projected that Bahamian economic output, or gross domestic product (GDP), will grow by 1.8 percent in 2024. That rate is some 0.5 percentage points below the 2.3 percent projected by the International Monetary Fund (IMF) in its most recent Article IV consultation and the Bahamian Central Bank, which is predicting similar growth above 2 percent.

The report contained several positives in that it maintained The Bahamas’ present ‘B+’ long-term credit rating together with a “stable” outlook, the latter of which signals that S&P is unlikely to further downgrade this nation’s creditworthiness within the next 12 months. It also gave credit for a “robust recovery” post-COVID and the Government’s fiscal consolidation efforts, which have slashed the deficit and contained debt.

But, on the negative side, S&P hinted that failing to rebuild fiscal headroom more quickly means The Bahamas remains highly exposed to hurricanes and other external shocks. “We think the country’s record of slow progress in reforming public finances and key economic sectors led to a weakening of its financial profile,” the credit rating agency added.

And Mr Bowe also warned that, while “we benefit from political stability we don’t benefit from the absence of political stupidity”. This, he explained, means that while the Government will “over-emphasise” the positive aspects of the S&P report and the absence of any further rating downgrade, the Opposition in turn will “over-emphasise” the negative findings even though both are responsible for national development.

On cue, Michael Halkitis, minister of economic affairs, in a brief reply to Tribune Business inquiries said of the S&P report: “We are very encouraged, but we understand there is more work to be done.” And Kwasi Thompson, Opposition finance spokesman, asserted S&P “did not adjust the economic outlook upward and, instead, the report tells a somewhat bleak story of the economic trajectory of The Bahamas”.

Other observers, speaking on condition of anonymity, said the S&P report was describing a Bahamas that is “treading water, not moving forward or back”. One added: “The way I read this is that if they don’t put forward a credible plan, absent that you’re going to continue to see this kind of sluggishness.”

Mr Bowe, for his part, told Tribune Business: “There was nothing in it that I call surprising. It’s a country report that any objective observer of the country would be able to tell you well in advance of that being released of the headwinds, which are well known, from the perspective of debt management and maturity profile.

“In conversations with them [S&P], they recognised the benefit of low interest rates and equally recognised the elevated risk for those purchasing them.” S&P, in its report, described the Government as vulnerable to refinancing risks given that almost 26 percent of its $11bn-plus debt is due to mature within one year and will have to be rolled over with existing investors.

While there is a risk that some could decide not to rollover their debt holdings, the rating agency acknowledged this was unlikely in the Bahamian context given the lack of alternative investments, somewhat captive market as a result of the exchange controls regime, and $3bn-plus of excess liquidity in the commercial banking system that is looking to earn a return.

“We expect declining deficits and a growing economy will lead to a slow decline in The Bahamas’ financing needs as a share of GDP, with the increase in general government net debt averaging 0.9 percent of GDP during 2024-2027,” S&P said.

“However, the country remains vulnerable to refinancing risks based on its significant short-term debt, with almost 25.9 percent of debt maturing in the next year. The Government expects this will be largely rolled over in the domestic market, which we think can absorb this debt, given the liquidity overhang and limited private-sector lending opportunities.

“While the Government will refinance existing domestic debt internally, it will rely on external sources to meet its higher borrowing needs but is likely to avoid external bond markets in 2024 and 2025.” S&P also noted that relatively high interest payments on the Government’s existing debt, with close to one out of every five dollars spent going towards debt servicing, limits funding for public services.

“The country’s external debt has risen in recent years.” the rating agency added. “Foreign currency-denominated debt is now 43 percent of total debt, underscoring the importance of generating sufficient foreign exchange to meet debt service needs.... As in the past, we expect the Government will continue to use commercial and multilateral bank funding to support its financing needs.

“We expect the government’s net debt will fall to about 70.3 percent of GDP by the end of 2024 from 80.9 percent in 2020, while interest payments will remain above 15 percent of government revenues for the next three or more years.

“The Government’s high interest payments, at 19.1 percent of revenues, makes it less flexible to meet economic and social spending goals. We net some of the assets held by the country’s social security system from our measure of net debt.”

Mr Bowe, meanwhile, said The Bahamas and policymakers need to focus on S&P’s forecast that GDP growth will decline to 1.8 percent in 2024. “The economic growth reverting to historical levels is going to be insufficient to expand employment and have a substantial effect,” he warned. “We have to pay particular attention to low growth rates and look at opportunities in front of us.”

While these included Baha Mar’s investment to replace the Melia, the proposed Ocean Club Residences and Sandals’ conversion of Emerald Bay to its Beaches brand, Mr Bowe added: “I think we see a lot of these positive signs and kind of rely on them in and of themselves to provide the economic stimulus as opposed to saying what should we do to complement them so that we have a better product.

“When we look at the tourism product we focus on the resort, not the economic spend of tourists. Are we looking at entertainment options outside the resorts themselves? Are we looking at the agriculture and farming industries to provide meats, vegetables and other products to these resorts so it has a wider trickle down effect into the environment in which we live?”

Mr Bowe also warned against allowing complacency to creep in because The Bahamas has escaped a further downgrade given that this nation’s creditworthiness remains below investment grade at so-called ‘junk’ status. He added that The Bahamas must develop a credible plan of fiscal and economic reforms and properly implement them so as to consistently upgrade its credit rating.

“Because there are no surprises that’s the upside with S&P,” he reiterated, “meaning when they came and did their review we can have some of that stable, positive outlook. Obviously there’s been a deterioration in the economic fundamentals of the country. What they [S&P] are looking for is a more stronger, positive outlook going forward that indicates preparedness for an upgrade in the rating.

“We have to be careful about becoming comfortable we’ve not had a downgrade. That isn’t the barometer we should be measuring ourselves by. We should be measuring ourselves by how quickly we return ourselves to investment grade status.

“Government will no doubt focus on the rating and the outlook staying the same, and the Opposition will say we are in ‘junk’ status. That’s the reality. We should not be comfortable with no downgrade. We should be expecting an upgrade from the initiatives we have put in place.”