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Current Deficits Could ‘Challenge Peg Viability’

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.”

Comments

John 6 years ago

Simply put the Bahamas cannot continue to operate the its economy the way it has being doing. The numerous leakages are not sustainable even in the near future, from foreign investments, from banks, from migrants legal and legal and from imports, specially where imports are increasing and exports are stagnant or even decreasing. It is pointless to increase the number of tourist coming to this country if the amount of each dollar that follows them back out of the country remains the same or increases. Not only is food production own in the country but more processed fast food is being imported at a higher cost than uncooked, unprepared food. Just look at the number of fast food places springing up all over the place. Fishing is a robber economy because the fisherman takes fish out of the ocean a doesn't put anything back. The Bahamas is a robbed economy because more is being taken out than what s being put in.

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The_Oracle 6 years ago

I wonder how much money Sir William, Pindling, Ingraham, and all the party cronies etc etc etc have off-shored? It is not the multi billion imports bill that has created the deficit, it is the political pilferage, waste, boodoggles, Government over-reach and negligence in tax collection that is responsible for the deficit. The more lies built atop lies, the more transparent the lies become. And you Sir, have presided over a part of it yourself.

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John 6 years ago

“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 This right here is the most dangerous part of the equation. If we continue to pile debt on top of debt, the time will come when the government will not be able to pay and they will default. That's when the fan will really stink. Instead of giving out seed money and assistance to farmers already in operation to improve or increase their yield, government dumped $25 million into a single project that already has a brown nose. Stimulating farming on the family islands also creates commerce. Whenever a dollar exchanges hands, value is increased. The more times a dollar changes hands in the Bahamas, the stronger grows the Bahamian economy. The National debt is growing about 10 times as fast as the population. Meaning, if nothing is done to improve it, by the time they turn 50, each citizen will owe more than 100 times in debt what he owed when he was born.

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