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Treat S&P Warning Like ‘Approaching Hurricane’

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James Smith

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas’ fiscal woes are in danger of becoming “a real millstone around the nation’s neck”, a key Ministry of Finance consultant has said, adding that Wall Street’s alarm bells should be treated “as seriously as an approaching hurricane”.

James Smith, a former minister of state for finance and Central Bank governor, told Tribune Business that “with or without” Standard & Poor’s (S&P) move this week to cut the Bahamas’ economic outlook to ‘negative’, the country had no choice but to tackle the Government’s mounting financial problems.

Suggesting that the first step was to develop a concrete plan to address the $4.456 billion national debt, and share this with the Bahamian people, Mr Smith said the Government over the past two years seemed to have been paying more than warranted to service its foreign-held debt.

Agreeing that S&P’s move was “really not unexpected”, the now-CFAL chairman told Tribune Business: “I think what they’ve done, in effect, is literally give us an opportunity to take stock and come up with some plan.

“With or without S&P, the growing debt, deficit and debt service ratio at some point, if not stopped, can become a real millstone around the nation’s neck.

“We have to devise some credible plan to deal with it in the medium term.”

This is exactly the prescription that S&P has given the Bahamas, hinting that a downgrade to the actual sovereign rating could be in the offing if the Government fails to develop a credible plan to get the public finances in order.

S&P and its fellow traveller, Moody’s, assess the creditworthiness of countries and their ability to repay their debts. The sovereign credit rating is the main indicator they use, and a downgrade indicates they have become more gloomy on a nation’s fiscal affairs.

A downgrade also indicates that the risk of lending to a particular country has increased, so any further cut to the Bahamas’ rating would see this nation’s borrowing costs on the international markets increase. And, with investors demanding more compensation for the extra risk associated with lending to the Bahamas, precious taxpayer funds would be sucked away from areas such as education, health and crime fighting.

While confirming that “internal discussions” were taking place within the Government on issues such as tax reform, Mr Smith said: “We need a more concrete plan we can share with the public, and that’s the next logical step in this process.

“We need to take the [S&P] warning quite seriously, as we do when you have a hurricane approaching.

“When you have an outside agency taking a look at what you’re doing, and coming to the conclusion that you need to do something, and do it soon, because you’re heading down a slippery slope, we ought to take it seriously.”

The latest fiscal figures, contained in the prospectus for the Government’s latest $100 million Registered Stock issue, make grim reading.

Even excluding debt principal repayment, it is running an almost-$143 million recurrent deficit, with estimated revenues of $1.536 billion dwarfed by $1.679 billion in recurrent spending for the 2012-2013 fiscal year.

And that is before some $358 million worth of capital spending, which does not even include advances to public corporations, enters the equation.

The CFAL chairman, though, said the latest S&P action was unlikely to impact foreign investor sentiment towards the Bahamas, at least in the short-term.

Mr Smith said such people would perform their own due diligence on the Bahamas and whether they could earn a better return here than elsewhere. And their projects were often insulated from what was happening in the domestic economy.

However, Mr Smith suggested that despite enjoy a solid credit rating in recent years, at least compared to many other states, the Bahamas appeared to have been over-paying in terms of interest servicing costs on its foreign-held debt.

“The other thing I’ve been noticing in the last couple of years is that although we had good ratings before the downgrade, we seem to have been paying lower than our ratings,” Mr Smith told Tribune Business.

“On US medium-term, we would have been paying 6-7 per cent. That’s what they’re charging Greece, and we don’t have a rating anything like it.”

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