The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas’ current account deficits could “challenge the viability” of its 1:1 currency peg to the US dollar unless they are reduced to ‘single digits’ over the next decade.

The warning was contained in Moody’s latest country analysis on the Bahamas, with the credit rating agency spotting the impact reduced foreign direct investment (FDI) inflows have had on the widening deficit.

“Like many of its regional peers, the Bahamas runs persistent current account deficits, reflecting the narrow nature of the domestic economy and leaving it dependent on foreign financing,” Moody’s said.

“The current account deficit averaged 14.7 per cent of GDP in 2009-2013, peaking at 19.4 per cent in 2013. Coupled with a fixed exchange rate, the current account deficit could create financing shortfalls that challenge the viability of the peg.”

This echoes the warning delivered by former finance minister, Sir William Allen, in the Fidelity Bank (Bahamas) annual report earlier this year, in which he said this nation was facing a “troublesome realignment” of its external accounts.

Writing in his capacity as the bank’s chairman, Sir William said the Bahamas had amassed a collective $5 billion-plus current account deficit over the past four years.

He suggested that the doubling of this nation’s current account deficit as a percentage of GDP, and the over-$2 billion (54.7 per cent growth) in foreign currency debt, suggest the Bahamas can no longer rely on foreign direct investment (FDI) and tourism spending to fund its multi-billion annual import bill.

Moody’s hinted at something similar, but said the end to construction on the $3.5 billion Baha Mar project should help return the Bahamian current account deficit to historical norms by reducing material and capital goods imports.

“While the coverage provided by FDI has diminished in recent years, leading to a widening of the basic balance deficit, there are other mitigating factors,” Moody’s said. “A large component of the widening of the current account deficit has been the increase in capital imports associated with the construction of large-scale tourism-related projects, particularly Baha Mar.

“As this project reaches completion next year, and the expected increase in tourist arrivals takes hold, we expect the current account deficit to narrow to single digits over the next decade.”

Moody’s added that the Bahamas also enjoyed strong coverage from current account receipts and its international foreign exchange reserves.

“Relative to the former, external debt servicing costs represent just over 5 per cent of total receipts, below the Baa median. Similarly, foreign exchange reserves give ample coverage of upcoming external debt payments,” Moody’s said.

Elsewhere, the Wall Street credit rating agency said the Bahamas enjoyed a favourable debt structure and maturity profile, despite the national debt standing at over $5.5 billion.

“The Bahamas’ maturity profile is favourable, with over 80 per cent of government debt maturing in more than five years, and nearly 65 per cent in more than 10 years. Given this long maturity profile, amortizations tend to be low.,” Moody’s said.

“Therefore, while the Bahamas has run large fiscal deficits, its overall financing requirements remain below those of other Baa-rated peers. In addition, the Government’s external debt as a share of total government debt is low and compares favourably with that of most rating peers.”

The rating agency added: “Despite the large increase in the debt ratio, the Bahamas’ debt structure mitigates some of the risks inherent to a sizeable debt burden. Although the government’s external debt has increased in recent years, debt remains predominantly denominated in local currency and held domestically.

“Owing partly to the existing capital controls, the Government has a captive domestic investor base in the form of local banks and the National Insurance Board, which holds about 60 per cent of government domestic debt. This investor base has helped the Government extend its maturity profile beyond 15 years.

“More recently, as authorities seek to build a local curve, they have been able to issue paper with low coupon rates and a maturity of two to five years. The paper has been readily absorbed, given the banking system’s ample liquidity currently and limited options for investors locally.”