The Tribune

By NATARIO McKENZIE

Tribune Business Reporter

nmckenzie@tribunemedia.net

THE Bahamas’ debt-to-GDP ratio could “very quickly” breach the 70 per cent ‘danger threshold’ if it continues to accumulate debt at the rates seen over the past decade, a former Central Bank Governor has warned.

During a presentation to a Nassau Institute-organised event, Julian Francis said a “firm resolve” by the Government over the next two to three years would be necessary to prevent that happening, warning that current deficit and debt levels were “unsustainable”.

“There’s no question in my mind that should we continue to increase the public debt at rates that we have seen over this last decade, within a few short years we will certainly arrive at levels which, for a small, largely undiversified revenue base, and open environment, would be unsustainable,” said Mr Francis.

He added, however, that despite the debt issue, the situation was not necessarily as dire as it is often made out to be.

Mr Francis explained that the foreign currency portion of the Bahamas’ national debt was what the country really needed to be concerned about.

“While the total debt in the Bahamas is $5.5 billion, and going to $6.5 billion, the fact is that the foreign currency portion of that is what, at the end of the day, the country really needs to worryabout,” Mr Francis said.

The Bahamas’ current foreign currency debt is around $1.1-$1.2 billion, around 20-25 per cent of the total. This relatively low proportion is helpful, as it means large sums of foreign exchange reserves are not being used up to help service this.

“ As far as the Bahamian dollar debt is concerned, the Government does have certain means at its disposal to be able to at least roll over that debt without default,” Mr Francis said.

“In terms of external debt, or what is owed to foreign institutions and parties, when they say you have to pay, you have to pay or go bankrupt. The Bahamas’ foreign currency component of the debt has always been relatively small and still is today.

“The external debt service ratio of the Bahamas has been 5 per cent of its earnings. That is one reason I say that, at the moment, the Bahamas can manage this picture, but should we continue the accretion of our total debt at rates which we have seen over the last decade, we will very quickly move form the 60-65 per cent ratio up to 70 per cent and further.”

Mr Francis added: “It seems quite evident that once you get above 70 per cent of debt-to-GDP, you do not only have issues such as the securing of the debt, but you have distortions which take place in your economy.

“The Government begins to crowd out the private sector, which means it has to borrow and there is no money left for private businesses which also need to be financed. When the Government begins to burrow so much of the domestic resources, inevitably it pushes the interest rates up and, to that extent, there is a distortion of the credit environment.”

Mr Francis said the country’s debt-to-GDP was approaching 60 per cent, and said this nation could avoid the 70 per cent threshold with a firm resolve from the Government.

“I am of the view that the Bahamas will still - despite where we are - be able to avoid the severe dangers which will come with a debt-to-GDP ratio at 70 per cent. We don’t want to go there, and I believe we can avoid that, but it would require firm resolve by the Government of the Bahamas over the next two to three years,” he added.

“If we are able to contain it within the 70 per cent level, which I think we can manage, and if we can begin to re-position our economy. which we are trying to do in some areas, eventually we will grow out of it.

“When the economy gets bigger, the debt in relative terms is smaller, and so that 70 per cent all of a sudden becomes smaller.”

Mr Francis added that at the end of 1979, the Bahamas had a national debt of $270 million, which rose by $900 million in the 1990s to $1.9 billion in 2000.

“At the end of 2011, the national debt was $4.36 billion, of which approximately $1 billion was foreign currency debt,” he added.

“Taking into account the approximately $1 billion likely to be added to the debt in 2012 and 2013, it seems quite likely the debt would have approached $5.5 billion, and the external debt, which is a part of that, would be 25 per cent of that.”