The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A former finance minister yesterday slammed Standard & Poor’s (S&P) ‘junk’ downgrade as unwarranted and premature because the Bahamas has “not reached the point of no return”.

James Smith, also a former Central Bank governor, told Tribune Business that the Bahamas was “nowhere near” ‘junk’ status because the Government was still able to service its direct $6.046 billion debt.

He explained that such a rating, which had cost the Bahamas’ its ‘investment grade’ status, indicated to global investors and the capital markets that a country was struggling to pay its debts - a position that this country is not in currently.

Pointing out that the country had not been forced into an International Monetary Fund (IMF) bail-out programme, as had happened to other ‘junk’ nations, such as Jamaica, Mr Smith said S&P had either “ignored or jumped” over these developments in the Bahamas’ case and gone straight to a downgrade.

He predicted, though, that the Bahamas may regain its ‘investment grade’ rating from S&P as early as the 2017 third quarter, once the rating agency saw the promised benefits from the Baha Mar project and other investments start to materialise.

However, the now-CFAL chairman said the S&P downgrade could not be blamed solely on the fiscal damage caused by Hurricanes Matthew and Joaquin, describing their impact as “the icing on the cake” for the rating agency.

This contradicts Prime Minister Perry Christie and his government, who have been trying to pin the downgrade on “acts of God” and the hurricanes in a bid to deflect attention from the fiscal economic policies followed by themselves and previous administrations - FNM and PLP.

Mr Smith also urged the Government to tackle the ‘ease of doing business’ as a way to kick-start the economy, warning that the bureaucracy and ‘red tape’ facing the private sector was getting worse - not better.

The former minister of state for finance, who held office from 2002-2007, said he did not disagree with S&P’s economic analysis and outlook, only its assessment of the Bahamas’ ability to service its debts, which is the main determinant of its sovereign credit rating.

“My argument has never been with the economic outlook; that it’s sluggish, and the debt trajectory is not moving as it should,” Mr Smith said, also crediting S&P from splitting out this nation’s $1.3 billion in foreign held debt.

“I also say the Bahamas is nowhere near junk, because that means a country is having difficulty meeting payments to satisfy its debt obligations.”

He argued that the Bahamas had not reached this state, with the Government still meeting all its obligations on time, despite increasing anecdotal evidence reaching Tribune Business that suggests it is encountering cash flow issues.

This is likely to be one reason why the Government is shortening the VAT filing/remittance window by one week to 21 days, but Mr Smith said its debt service ratio, as a percentage of revenues, was still relatively low.

Many observers are likely to question this comparison, but the former finance minister said the Bahamas’ debt service ratio was well below the ‘40-45 per cent of income’ limit applied to Bahamian households.

Tribune Business calculations, based on the 2016-2017 Budget figures, show that total debt servicing costs (principal and interest) of $569.12 million amount to more than 26 per cent of the Government’s projected $2.176 billion in revenues - with the latter figure likely having been thrown off by Hurricane Matthew.

Mr Smith, meanwhile, said that because the Government’s Budget was presented on a cash basis, S&P never factored in its assets and ‘balance sheet’ into analysing the Bahamas’ sovereign creditworthiness.

Apart from its equity interest in the Bahamas Telecommunications Company (BTC) and Arawak Port Development Company (APD), Mr Smith said the Government could also sell-off or lease other income-generating assets if required, such as the Paradise Island Bridge Authority.

The former minister suggested that measures could be taken “to reduce salaries and the wage bill” in the public sector if the Government found itself in dire fiscal circumstances, while it also owned thousands of Crown Land acres that could be sold or leased.

“There are many layers of liquidity you can free up to meet public debt obligations,” Mr Smith told Tribune Business. “And we’ve never been in an IMF programme.

“All of these issues other countries have gone into, but they [S&P] have seemingly ignored or jumped over these things to go straight to a downgrade.”

With the Bahamas still meeting all its obligations on its $1.3 billion external debt, and tourism foreign currency earnings “still very positive”, the ex-minister said S&P should have factored this into its analysis.

Mr Smith added that the rating agency was effectively telling global investors that the Bahamas “can’t meet its obligations”, thereby increasing the country’s debt costs “when you haven’t reached that point of no return, because you have not exercised any of the other options”.

Suggesting that S&P might soon revise its Bahamas credit rating, he said: “They cannot discount the impact of Baha Mar.

“I suspect that in their case they did not take the project into account, because we’ve had too many false starts. They said: ‘Wait and see what happens’.

“If this comes off in the first half of next year, as I suspect it will, we’ll have investment grade back very soon; within a half year, probably in the third quarter, assuming Baha Mar comes on stream. That probability is much higher now we have a new owner with deep pockets.”

Baha Mar’s new owner, Chow Tai Fook Enterprises (CTFE), is expected to hire 1,500 Bahamians by the start of April 2017’s phased opening, with this number increasing to 3,000-plus by August and around 4,000 at year-end.

Mr Smith, though, urged the Government to focus on tackling long-standing structural weaknesses in the Bahamian economy.

“We need to step back and develop policies and programmes that reset the economy for sustainable, positive growth,” he told Tribune Business.

“Businesses are spending a lot of time shifting papers and going from agency to agency. It’s not getting any easier; it’s getting more complicated.”