Any endeavour that does not seek answers and direction for improvement is but a frolic. The circumstances regarding The Bahamas fiscal affairs are much too important and the issues far too critical for us not to be actively looking for insights on how to move forward. In this regard let us start where we ended Part I. I stated then, “Alongside the negatives [taken into account for the rating], every positive element has [also] been considered. The upside therefore must rest in reversing the negatives and improving on the positives”. It is evident that there is much to be done, but how do we do it? How can our policymakers move to achieve outcomes that are more positive? Are the improvements needed within our capacity? We will seek to tease out answers to the former questions. For the latter the answer is an unequivocal yes! It can be done if it is approached fundamentally, respects the delicate trade-offs, avoids expediency and result in a sound suite of supportive policies and reforms that address the deficiencies of our economic and fiscal arrangements. With this in mind, let us walk through the Moody’s 2022 report and consider the way forward. According to Moody’s, The Bahamas’ credit strengths lie in its “Comparatively high level of GDP per capita”; “High policy predictability and a stable political system” and “Favorable debt structure, which mitigates risks related to sizable debt burden”. The rating therefore benefits from its high per capita income, which sits easily within the top five in the Americas, a perennially stable political system and a debt stock with well-staggered maturities. The latter point means less potential stress to extreme liquidity challenges in terms of timing to secure capital repayments. The rating agency is convinced that the country will make the right policy decision or has extremely limited options and will therefore make the right moves. These are important positives. On the other hand Moody’s sees the country’s debt challenges as the very obvious “High debt and interest burdens”; “High dependence on tourism and low long-term economic growth prospects” and “Exposure to climate-related risks”. There is nothing here that we don’t already know. The national debt is expected to peak above $11B; annual interest, approximately $0.5B; and we are all generally aware about what might happen if another hurricane should hit the country. The one aspect normal conversation does not always cover is the “low long-term economic growth prospects”. Over the long haul, Moody’s and others see the country continuing to grow at low rates. I believe that this is where the conversation turns and become excited. Unlike debt and interest that cannot change overnight, every prediction on growth potential is based on what currently exits. Every new plan, policy changes, interventions, investments or reforms has the potential to change that positively. The first major take away therefore is that The Bahamas must find new ways to “urgently” influence its growth prospect, positively influence its economic outlook and therefore shift the view on its forward-looking ability to manage the current debt stock without running into liquidity challenges. Both the public and private sector has a defined role to pay in this regard. We must innovate for better outcomes. Any plans implemented now will at best only have mid to long-term impact. The question is how any rating agency would consider this. Greater prospect for growth would mean greater
affordability of interest payments and potential change in the growth trajectory of debt. Therefore, any policy outcomes that support greater credit worthiness must attract a favourable reaction. According to the report“ The implementation of fiscal and economic policies supporting a fiscal consolidation process that places government debt on a more durable downward trajectory would likely result in a return to a stable outlook. An improvement in debt affordability, which includes relying more on lower-cost domestic and external official sources of funding over more expensive external market issuance, could also support a return to a stable outlook.” The most obvious point here is that there is little possibility of an upgrade. Our focus must shift to the fact that downgrade are but symptoms of much larger issues. Taking action that reduces debt, borrowing more funds locally at cheaper rates, using cheaper external sources are critical components for the way forward. They are lynchpins to changing the economic outlook from a credit perspective. The actions needed are relatively clear. The challenge is, for example, would the government be able to secure reasonable (quantum and pricing) funding in the domestic market? There are suggestions of reluctance in the local market to extend loans to government at the lower rates envisioned by the statement. However, if we are unable to bridge a portion of that gap locally is it possible to contemplate that we will be able to blunt the stress of the current debt stock? Given the current global demand for debt and our high per capita status, can we reasonably secure sufficient funding from multi-lateral agencies to change the debt profile? Regardless of the answers, these changes most likely to influence an upgrade of The Bahamas sovereign rating. Ultimately it will is the ability to replace existing debt with cheaper ones that will have the most positive effect on the portfolio, to be followed later by an improved ability to retire them. Given the state of the country’s finances, such retirement of debt is will likely only possible with, increase taxes, reduced spending or, more preferably, growth. There is also the possibility that local players will consider the fact that government (and country) needs a real lever by which the debt burden can be reduced. Possibly the domestic market players might understand that such an action holds long-term benefit for the domestic market and economy. It is possible that there is an understanding that a greater rebalancing of domestic to local debt will improve the country’s debt affordability, reduce the cost of borrowing and positively influence the economic outlook of the country. In addition, maybe, just maybe we are at the point where there is a recognition that the moment a national outlook is here and that our collective wellbeing is very dependent of our collective actions. It is my view that the government alone cannot solve the current state of the economy without being disruptive. The country has experience many downgrades. Considering everything, bonds yielding10% plus; approximately $4B in loans maturing over the midterm, the uncertainty of the Covid pandemic and the impact of the continued Russia-Ukraine war environment, another downgrade would be devastating. Moody’s indicate that such a downgrade, “would be likely if a slower pace of fiscal consolidation contributes to tightening financing conditions and a rise in borrowing costs, which challenges the government’s ability to finance fiscal deficits and maturing debt.” I strongly believe that as you absorb this statement you will develop an appreciation of the need for urgent but careful debt management actions and finding ways to expand the economy.
At this moment, the deck is not stack in our favour. The high inflationary pressures, spurred by the war and the impact that could have on disposable income in our tourism markets. The potential for a global recession influence by the war; lockdowns in China, rising incidents and concerns for Covid elsewhere. Rapidly increasing cost of producing energy. The country faces these stark realities. These are real threats to fiscal consolidation and therefore exposure to the risk of downgrades. Consider the additional cost this would exert on the country. Consider the increase rollover risk. Consider the disruptive impact this would have, creating a need to ration resources, reduce spending on critical areas of the economy. This why the case for targeting higher revenue-to-GDP is easily made and explains why policymakers are exploring all the options at this time. This is also one reason no entity or sector should contemplate taking actions that might jeopardize any aspect of the recovering economy. The circumstances are just too delicate now to take any such chances. We are at a moment where every sector should be asking where we fit into the solutions. It is hard to avoid the screaming headline generated from a credit downgrade but how often do we stop to listen to the underlying whispers that created it? The Bahamas is rated Ba3 which places in a speculative category or as some like say, junk bond status. How did we get there? As we search for insights for future resiliency and sustainability, let us examine the component parts of The Bahamas’ rating. “Economic Strength” - and “Institutions and Government Strength” rated ba3 and ba2 respectively. Combined they determine the country’s “Economic Resiliency” which was rated ba1. This places the country at best end of the speculative class. “Economic Resiliency” combined with “Fiscal Strength”, rated caa2, determines the “Government Financial Strength” which displays a deterioration from the ba1 position due to very weak fiscal strength. Overall therefore the country is seen as weak, the weakest link being the fiscal state of affairs. This clues us in on a few things. If the country is able to get to the surplus positions projected by the administration its fortunes will definitely start to change. The likelihood of getting there via growth is limited and therefore the need for other fiscal measures becomes highly possible. The possibility of a significant shock could place the country’s sovereign rating in unenviable company. We are at a point where forward thinking and aggressive action must be the order of the day. The country is rated Ba3, the lowest of the speculative element class, but falls in a range that includes ratings two notches lower, because of susceptibility to climate events. We have no control over the latter and must therefore focus on remediating “Government Financial Strength”. I draw attention to the fact that it is the much narrower capacity of what government is able to afford financially that is being measured, not the country’s financial strength. The credit rating does not reflect of the country’s ability to afford debt but rather the ability of the government, given its current policies. The implications are clear. We must work collectively to change the national circumstance or be ready to cope with the alternatives.
******* © Hubert Edwards 2022
Hubert Edwards is the Principal of Next Level Solutions Limited (NLS), a management consultancy firm. He can be reached at info@nlsolustionsbahamas.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.