DOWNGRADE ON DAY ONE



The pendulum has swung the other way. The people of The Bahamas have spoken and there are some important lessons to learn, and thinking to shift based on the results of the process and the extent of the participation. Congratulations are in order for Prime Minister the Hon. Philip “Brave” Davis and Deputy Prime Minister Hon. I. Chester Cooper on leading their party to victory. There will be great demands on their leadership and significant expectations, consistent with their own pronouncements on the campaign trail and during the swearing in ceremonies. The declarations are important, as over at least the next five years, the fate of the country will lie in the hands of these two individuals.


Incidentally, both honourable gentlemen are members of Toastmasters. Both have achieved the highest award possible in this program, a Distinguished Toastmaster (DTM), with Mr. Cooper at the time being the youngest person in The Bahamas to do so. Many others and I will be actively looking to consistently see the values of Toastmasters International - Integrity, Respect, Service and Excellence - being the hallmark of their leadership. As a country, we must wish them well and be prepared to work alongside the willing to make this country better. I commit to continue my contribution through writing and commentary, to draw attention to what is good, what may not be good and potential solutions for problems observed, all with the same level of objectivity I work hard to maintain.


Moody’s has downgraded the sovereign rating on The Bahamas national debt. To say that this is most awkward in its timing would be an understatement but it potentially explains recent developments. Elections are about ideas and choices and the recently elected PLP administration has outlined some very important initiatives with at least one in direct contradiction of this downgrade, the plan to reduce VAT. Losing approximately $200M was always going to be challenging but must take on a very different view now in light of the new ratings. This development is significant in that it has direct implications for a largely unfinanced budget. This may be indicative of the space between the administration’s platform and reality, based on deep budgetary constraints


This downgrade is a big and urgent issue to contend with, given there is $1.6B on the table that is not yet financed. Most importantly about half of this amount is earmarked for debt repayment and consequently the implications are significant. The country cannot afford to default on its debt. It is not likely to do so but this shift creates a reality when faced with borrowing more expensively, and potentially having some measure of difficulty in doing so, the country may need to reschedule or reorganize large portions of debt, attracting additional costs than previously budgeted. It bears reminding that the current budgeted cost of debt is $512M, approximately 1/6th of projected revenue. This downgrade sets the stage for additional cost, increased deficit and greater difficulties in refinancing.


This is not a good development for the country and the new administration. My recent article carried in the Tribune looks at a number of challenges that would face the winner of the election. While it did not anticipate this development, there was extensive focus on the limiting effect the current debt stock would have on decision-making. Every decision, new initiative, new idea must pass through the crucible of a constraining debt burden. This new twist is an important extra wrinkle in that formula when one consider not only the actual extent of the downgrade but also the stated basis of significant erosion in the economic strength of the country and the expectation of slow recovery up to 2024. This latter position holds important inferences for the realization of budgeted revenue and therefore containing the size of the deficit for 2021/22.


The article, Time to Face the Brutal Facts, generally sought to address this very type of occurrence. The fact is that the country has huge economic challenges. The reality is that up to now the discussions from policy makers have not fully elaborated on the depth of the challenges. While the understanding gleaned from publicly available information provides a reasonable appreciation, in my analyses, as a rule of thumb, I always conclude that such pronouncements are never as good as stated, when they are good, and likely much worse, when they are bad. It calls for us to face up to the facts of the issues affecting the country, refusing to tiptoe around the issues and take them on. These issues are not limited to raw economics but matters cutting across all vital segments of the country's economic arrangements, together with social challenges. A downgrade on day one in office! The timing has to be uncomfortable. However, as former Governor of the Central Bank James Smith alluded to in a recent interview, there are some things which the government must now have frank conversations with the public about, it is imperative.


It is time to get down to the essentials of economic recovery in new and bold ways. Business as usual long went out the window with hurricane Dorien, the entrance of Covid-19 in the country, and back-to-back record deficits and debt levels approaching $11B. I think it is obvious that this new PLP administration will have no honeymoon. The issues are simply too large, concentrated and urgent for anything other than the moments of celebration on election night. Beyond honeymoon, it should be accepted that the historical cadence of addressing matters just will not work. The quantum of borrowing required, the possibilities of another high deficit in 2022, proposed but now unlikely reduction in taxes, amongst other things, are all important factors at play here. Plans are quickly meeting the dynamism of a highly disrupted and disruptive reality and careful but bold nimbleness will be the order of the day. We must now also be hopeful that there is no major additional adverse effect from COVID-19 cases due to the election, leading to any further major disruption in national commerce.


Maybe the greatest threat of this development is the often-repeated need to enter into some arrangements with the IMF. It is my view that this should be avoided at all cost but as the downgrade is signaling, this avoidance cannot be achieved on the cheap and therefore the matter of the IMF will linger on the periphery of all discussion and very uncomfortably so. There is a price to be paid for the increase in our national debt. There must be concerns about the future state of our reserves. Far thinking persons must reasonably be considering the efficacy of our tax regime. The new administration will no doubt be mindful of the potential impact this and likely other developments may have on its platform, Blue Print for Change.


It is time for all to join hands. This will need all effort in one focused direction. Overall, the country should be uneasy about where we stand now. However, this is where the impact of clear, capable and competent leadership will make a difference. The new administration no doubt has significant resources in the form of advisors to call on and will no doubt do so. My only admonishing would be as I did in the recent article, plan for the long haul and be as inclusive as possible. Make decisions that are designed to secure long-term value. Strategize, implement and execute for the long term, as part of the price that must be paid for recovery, accept the obvious near term sacrifice and pain. Engage the totality of the collective intellectual power and brawn that the country has available to it.


It was said that the country needed a small miracle to get out of the challenging circumstances in which it currently is. My response to that statement, in the article mentioned, was that there are no miracles likely to emerge in this current challenging global environment. I also stated then that small miracles have in the past taken our eyes off the areas of focus leading ultimately to the problems not being fixed. In a perverse sort of a way then, this downgrade could be such a small miracle. Not an ideal one but if it creates greater impetus to direct focus from day one on what truly matters then maybe, just maybe in the end we may come out the better for it.


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© Hubert Edwards 2021


Hubert Edwards is the Principal of Next Level Solutions Limited (NLS), a management consultancy firm. He can be reached at info@nlsolutionsbahamas.com. Hubert specializes 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.

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