National Debt And Economic Recovery – A Perspective through Moody’s Ratings (Part I)
The Bahamas is standing at a cross roads of growth and development, burdened by debt and the heavy weight of the critical decisions needed to take it forward. The options are limited, the decisions are time sensitive and the outcomes, regardless of what they are, will be fundamental to the well-being and standard of living of the populace. The question this begs is whether there are viable paths. In what direction should the country move? What are the tradeoffs that must be made? What are the policy positions which must be brought to bear and what uncomfortable but necessary conversations are needed to be had? I believe that the policymakers, having laid out their debt strategy and projected trajectory for fiscal performance, must pay careful attention to any lack of congruence existing between the two and further articulate how the existing tensions between the circumstances of the national debt and the much desired national growth are being reconciled and managed.
In its recent credit ratings report, Moody’s gave its assessment of the recent fiscal projections, “The government's assumptions about revenue growth may prove overly optimistic, risking a more gradual path to fiscal consolidation. Unexpected shocks along with implementation slippage are two key risks to the projections. Efforts to improve efficiency could fall short and force the government to pursue contentious tax-raising measures.” This isn’t the first, in recent times that Moody’s appears to be dousing the pronouncements and projections of an administration. What is their motive? Why is Moody’s seemingly against The Bahamas taking a more optimistic view of its own affairs? Well as a sovereign rating agency it has an obligation to its clients and market, those who rely on it for market intelligence, to present what it believes is the accurate state of affairs.
This doesn’t mean the Moody’s is right and the government wrong. It simple means that there is a difference of opinion. That difference though holds important implications for the country. As the government tells its story about the path to recovery, Moody’s and similar agencies are also telling a story about a subset of that equation, the national debt. What is important though is the fact that both stories demand circular arguments and reasoning. Economic recovery is highly dependent on the effectiveness with which the current debt is managed, reduction in interest load and reduction of debt stock to sustainable levels. On the other hand, the extent to which the current debt can be effectively managed is highly dependent on economic recovery, reduction in deficit spending and realization of surpluses. Beyond the return to pre-pandemic norms, ultimately neither the future state of debt or economic conditions will independently change for the better. In this regard the national debt and economic recovery is inextricably tied to each other and so too is the fate of the general populace. The IMF, eloquently puts it this way, “Even with significant fiscal consolidation, financing needs will decline only gradually over the medium-term. This creates elevated risks of the country finding itself in debt distress. Mitigating these risks will require careful planning.”
In my recent piece on the IMF’s 2022 Article IV Concluding Statement, I stated, “Regardless of the nature or tone of the commentary, it is critical that where the suggestions makes sense that there should be wise movement in those directions. Given where the country is economically, it is important that we draw on all available sources, in a serious and practical manner. This must be done with a view of solving the problems which currently ails us and positions us for the a more vibrant and resilient future, a future where we are able to better cope with the shocks, internal and external, which will continue to assail us.” This was a call to use information available to us to better appreciate the current state of affairs but more importantly to find solutions going forward. The IMF stated in the recent Article IV concluding statement, “The Bahamas would benefit from a more robust multi-year debt management strategy”. A message worth reflecting on. Moody’s has laid out some important insights in its report. If we pay careful attention to the constituent parts of these report, not just to the headlined items, there is much insight to be gained.
Before analyzing Moody’s 2022 report, let us consider some of its previous positions and see how they inform current realities. In its 2021 ratings Moody’s noted that it, “expects the gradual recovery in tourism to leave a long-lasting impact on The Bahamas’ credit profile through materially higher debt and interest burdens, which will significantly exceed those of Ba3-rated peers.” The latter part of the statement is important. While there are many factors working in favour of the country, its debt circumstances makes it an outlier compared to lesser developed countries. The current experience therefore of higher debt yields should not be unexpected. The rating category of Ba3 is considered to have speculative elements and are subject to substantial credit risk. The Bahamas is rated Ba3, with a negative outlook. Appreciating that the country is an outlier within a speculative class, having debt levels beyond most these very risky peers, underlines the pressure we face in financing current and future debt and the urgency for a turn around.
Again in 2021 Moody’s noted, “The Bahamas’ debt burden was already higher than Ba-rated peers prior to the pandemic, and will remain above similarly rated peers as the economy recovers only slowly from the pandemic.” Reminding ourselves of the fact that these statements are primarily “conversations” directed at current and future bond holders, we should be able to bring clear context to the performance of our sovereign bonds on the international market before and since September 2021. The rating agency clearly noted that compared to other speculative options the Bahamas is likely to be at a greater disadvantage. It would be no surprise therefore that such investors would treat bonds of countries that many would consider “lesser” than the Bahamas as being of greater quality. It’s possible to glean this message from the 2021 statement suggesting that the pandemic “…has fundamentally weakened The Bahamas’ credit profile with lasting consequences in terms of a higher debt burden and weaker debt affordability, as well as reduced economic strength.”
Why is this important? How does this tie to main point being discussed here? The answers lie primarily in the fact that there has been no great change in circumstances. This is evidenced in the new 2022 report, “The Bahamas’ debt burden likely peaked at 89.4% of GDP as of the end of fiscal 2021, while the interest-to-revenue ratio will peak in fiscal 2022 at 24%”.These ratios are among the highest for Ba-rated sovereigns.” The country is expected to remain firmly rooted in the upper tier of an adverse classification. The country is well beyond sustainable levels of debt and the market perception of its recovery is not good. By understanding that almost one quarter of government’s revenue will go to pay interest we start to appreciate the extent to which the current levels of national debt will influence economic recovery, market perception and the ease of securing future financing. Policymakers’ most urgent concern is likely to be how to change the market sentiment and reduce the proportion of revenue going to debt servicing, facilitating greater investment capacity for productive infrastructural development and prime the economy for growth.
This 2021 statement from Moody’s aptly describe the current situation the country is experiencing “…driven by the removal of COVID-related spending on unemployment benefits and other related items, along with a revenue recovery, will support fiscal consolidation, which will reduce the debt burden gradually.” The pandemic has shifted positively; there is a return of tourism dollars, reportedly at a better than expected level; and spending on social support is all but gone. Under these circumstances, if sustained, there is a reasonable expectation for debt reduction. It is therefore the cadence of this reduction which poses a risk for The Bahamas. Consider this IMF pronouncement “The factors most likely to affect the Bahamas’ credit quality are the pace of fiscal consolidation, how quickly the government returns to fiscal deficits consistent with reducing its debt and how the government meets its relatively large financing needs over the next two years without putting downward pressure on debt affordability and increasing liquidity risk. Financing needs and liquidity risk will remain high over the next two years.” The IMF projects the horizon for a notable downward shift in debt is still at best in the mid-term, which is generally consistent with the government’s own strategy.
The next two years or so will therefore be very crucial. Despite anticipated positive fiscal consolidation, the expectation for economic performance is low, high interest load, and slow debt reduction. Given that these projected outcomes appears reasonably firm it would be expected that policy makers will be use this window to curate and nurture near-term adjustments such that the benefits will begin to materialize by then or sooner. It is important therefore when the rating agency pointedly states, “The government's assumptions about revenue growth may prove overly optimistic, risking a more gradual path to fiscal consolidation. Unexpected shocks along with implementation slippage are two key risks to the projections. Efforts to improve efficiency could fall short and force the government to pursue contentious tax-raising measures” that the administration remains mindful of the need to demonstrate the soundness if its projections, the soundness of its policy selection and the potential impact of its chosen reforms. The communication of a sustainable positive future state is critical to unlocking possibilities for the economy bearing in mind the opening statement in Moody’s 2022, “The Bahamas' credit profile incorporates the country's moderate economic strength, reflecting its subdued economic performance, high wealth levels and moderate institutional strength.” Alongside the negatives, every positive element has been considered. The upside therefore must rest in reversing the negatives and improving on the positives.
In Part II we will conclude the analysis by clinically focusing on the Moody’s 2022 report.
© Hubert Edwards 2021
Hubert Edwards is the Principal of Next Level Solutions Limited (NLS), a management consultancy firm. He can be reached at email@example.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. He also chairs the Organization for Responsible Governance’s (ORG) Economic Development Committee. This and other articles are available at www.nlsolutionsbahamas.com.