Bahamas’ return on FDI under 5%

As of Friday, January 27, 2017

By NATARIO McKENZIE

Tribune Business Reporter

nmckenzie@tribunemedia.net

Foreign direct investment (FDI) is “not the panacea that governments think”, a well-known businessman is arguing, suggesting that the returns are “less than 5 per cent”.

Ophthalmologist Dr Johnathon Rodgers, giving a lecture hosted by the Nassau Institute think-tank, entitled ‘Is devaluation in the cards?’, argued that the purpose of FDIs was not only to attract foreign currency but stimulate the Bahamian economy.

“Foreign direct investments are not the panacea that governments think they are,” said Dr Rodgers. “When you look at all the subsidies, all of the Crown Land and concessions that that go into it, return on investment on direct foreign investment is less than 5 per cent.”

He added that many of the goods and services consumed by FDI projects were procured outside the Bahamas, meaning that more money was still leaving the country.

“Crown Land is a very important asset. Crown land in this country is the biggest national asset, and it has been abused and misused by successive governments over the years,” said Dr Rodgers, arguing that its management should be left to the private sector and made accessible to everyone.

Commenting on the recent downgrade by Standard & Poor’s (S&P), which reduced the Bahamas’ creditworthiness to ‘junk’, Dr Rodgers said this would drive up the cost of government debt on the international markets.

“Obviously, the cost of debt is going to go up. The banks, who have a lot of government debt on their books, will have to mark that down, which means they will have to recapitalise,” Dr Rodgers said.

“The next thing is who is going to buy the Government debt next time they need $100 million. The banks can’t give them the money, the insurance companies can’t give them money because they can’t invest in anything less than investment grade, since they have a fiduciary responsibility to the policyholders or pension fund holders.

“The Canadian banks received instructions last year that they can’t buy any more government debt. NIB has too much government debt in its portfolio already. Things are really going to hit the fan when the next $100 million issue comes up.”

Such an outcome is by no means certain, given that the downgrade will have no impact on the Government’s Bahamian dollar debt, which accounts for 75 per cent of its debt holdings.

Future domestic debt issues have also likely been made cheaper, along with many existing tranches, as a result of the recent Bahamian Prime rate cut, so the Government’s ability to borrow locally may not be as negatively impacted as Dr Rodgers thinks.

However, he argued: Our currency is way overvalued.That increases the trade deficit and increases the drain on the US dollar reserves. It gives you a false sense of security.”

banker 7 years, 3 months ago

Here are several cogent points that are not factored into the eye doctors simplistic understanding of how the banks and debt works.

1) All banks except Bahamian banks, after the downgrade, have either sold off their Bahamian sovereign debt, or have bought credit default swaps against them, thereby nullifying the higher rate of interest return that Bahamian sovereign debt carries for the holder of the bond.

2) The Bahamian sovereign debt once held by AA3 rated banks that has been sold, is often sold to investment banks at a deep discount. The investment banks use the cheap high-yielding but dodgy bonds as an arbitrage hedge against other positions. Yes, there is an active market for crap, sold at the correct mark (or discounted value), which never ceases to amaze me, yet savvy arbitrageurs spin this crap into profits. However it is always at the expense of the initial sovereign issuer (often times the expense is negative perception and lack of ability for the sovereign issuer to sell the debt unless it carries an abnormally high interest rate -- then again, the arbs buy it as a hedge to play with the balance of their portfolios).

The scenario which the naive doctor paints, of the government not being able to float any more debt is not accurate. One can even buy Greek bonds and there is an active market for it. The way that it will work, is that the government will issue a bond for $100 million at 5%. There will be no takers. They keep raising the interest rate until it hits 10%. There will be a rush to buy it by the investment banks. They will buy credit default swaps to mitigate default risk that effectively reduces the yield to say 5% which brings it in line with other higher rated debt. Or they will buy the debt and create a CDO or Collaterized Debt Obligation with a basket of sovereign debt from a mix of countries that will even out the risk. This is like adding sugar and flour to shit cookies to make them more edible. Then they will sell shares in the CDO again to arbs and hedges. But again, this doesn't do any good to the hapless issuer.

The doctor is also naive about "Crown" lands. He posits that Crown land administration should be given to the private sector. There is not one single instance in the world of lands belonging to a country not being administered by the government of that country. It is the very definition of Crown land or land within the borders held by the government. Can you imagine if the Snake got control of who gets access to Crown land -- especially with the high corruption index and lack of transparency with the PLP kleptocracy????

C2B 7 years, 3 months ago

Hahaha. That's a good one Banker. If the politicians controlled Crown land, we would owe land, and be making islands like the Chinese in the Pacific.

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