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‘No Way’ Bahamas Can Be Cut To Junk

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James Smith

There is “no way” that Moody’s can cut the Bahamas to ‘junk’ status because it is still meeting all its debt obligations as they become due, a former finance minister argued yesterday.

James Smith told Tribune Business his only “problem” with the rating agency’s threat to downgrade the Bahamas was that it ‘left the door’ open to a loss of this nation’s investment grade status.

He argued that the Bahamas was “a long way” from such a position, given that it always been able to meet its debt obligations - and would continue to do so into the foreseeable future.

Mr Smith said a cut to so-called ‘junk’ status was only warranted if a country was unable to pay its debt as it became due, and the Bahamas was “still not in that position yet”.

Seeking to clarify his position on Moody’s threatened downgrade of the Bahamas’ sovereign creditworthiness, Mr Smith conceded that the country’s economic and growth performance had been “bad”.

Yet he said the New York-based rating agency also needed to account for the Bahamas’ credible track record, which showed it had not been forced to seek International Monetary Fund (IMF), or initiate a ‘fire sale’ of public assets, during 43 years of independence.

“I don’t have a problem with their past analyses or even the series of downgrades,” Mr Smith told Tribune Business. “My problem is a downgrade that cuts the position to ‘junk’.”

Moody’s left open this possibility in Friday’s announcement of its two-month review of the Bahamas’ sovereign creditworthiness, saying that a downgrade might cut this nation’s rating by “one or more notches”.

A two-notch slash would take the Bahamas to ‘junk’ status, costing this nation its investment grade rating, and sending a profoundly negative message to the international capital markets and both Bahamian and foreign investors.

Mr Smith, though, argued that it would be illogical for Moody’s to initiate a ‘junk’ downgrade, as it was akin to saying “that the Government will be unable to meet its debt obligations as they come true”.

Pointing out that such an action would also rate the Bahamas below the likes of Barbados and Jamaica, both of which have much more significant debt mountains and fiscal problems, he told Tribune Business: “No way in the Bahamas at this time can you reach that conclusion.

“If you’re telling me that I can’t meet my debt obligations, I have a real problem with that.”

Mr Smith said there were “many reasons” why ‘junk’ status for the Bahamas was not warranted, beginning with the Government’s debt servicing ratio.

For the 2016-2017 Budget, the Government is forecasting it will spend $271.735 million on paying interest (debt servicing) costs, with another $281.081 million going towards repaying debt principal as it matures.

The collective $582.816 million in debt-related spending, Mr Smith said, amounted to just 25.8 per cent of the Government’s budgeted $2.263 billion in spending for the new fiscal year.

He compared this to the 40 per cent debt servicing ratio adhered to by bank loan officers when assessing a potential borrower’s creditworthiness, and said the Government’s was “half that amount”.

And, should the Government find “its back against the wall” at some stage, Mr Smith said it owned a considerable portfolio of economic and infrastructure assets that could be sold to generate cash.

“There are areas the Government has yet to touch in terms of outsourcing and privatisation,” he told Tribune Business, citing its 49 per cent equity stake in the Bahamas Telecommunications Company (BTC) as an example.

BTC continues to generate profits of around $40 million per year, and Mr Smith said other revenue-generating assets included the likes of the Paradise Island Bridge.

“You don’t see an asset register because the Government doesn’t have a balance sheet,” the former finance minister and Central Bank governor added.

“But for these reasons, any objective analysis would find the Government is a long way from not being able to meet their debt obligations.”

Mr Smith further echoed the Christie administration’s rationale for why a downgrade was not warranted, explaining that the composition of the Bahamas’ $6.6 billion national debt was key.

He said the maturities/redemptions for the Government’s various bond issues were spread out over the medium and long-term, meaning the Bahamas would not be faced with having to finance massive nine-figure repayments at any one time.

And just $1.733 billion, or around 25 per cent, of the national debt is held by foreign investors. The majority is owned by Bahamas-based institutions, such as the National Insurance Board (NIB), Central Bank and commercial banking industry.

This favourable debt profile, Mr Smith explained, would enable the Bahamas to reschedule or restructure the bulk of its debt as a last-resort option, should this become necessary.

“We’re a long way from not being able to meet our debt obligations,” Mr Smith told Tribune Business.

“We’ve never been forced into a position of reliance on things like sales of assets, restructuring or outsourcing. Good or bad, we’ve never been forced to make any real draconian changes in policy. We’re still not at that point yet.”

As a result, Mr Smith said it was impossible for Moody’s to cut the Bahamas’ sovereign creditworthiness to ‘junk’.

“I’m saying these guys can’t say that,” he argued. “If they do, we’ll have to look elsewhere. That’s the point I’m making. It’s not a threat to them.

“It’s not a downgrade; it’s the ‘junk’ status. There’s no way in my estimation, and in many other people’s estimation, that the Bahamas can be ‘junk’, and Barbados and Jamaica can’t.”

Mr Smith agreed with Moody’s analysis that the Bahamas’ economic performance had been “really bad”, but added that this was partly explained by the world economy’s uneven outturn, which impacts the external forces affecting this nation.

“To say the performance is bad and that we have to get some growth in here, I have no problem with that,” he told Tribune Business.

“But the bottom line is that we’re nowhere near that sort of thing ‘junk’ status, and they ought to know that.”

Comments

Reality_Check 3 years, 11 months ago

What an idiot! Smith has been drinking too much Greek wine for far too long. I didn't even need to read the above article to reach that conclusion, and I'm known to have an exceptionally open mind!

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Abaconian 3 years, 11 months ago

It's not just about whether you can meet debt obligations as they fall due.. They take into consideration a number of factors. Corruption plays a role. The rate of economic growth plays a role. The debt to GDP ratio plays a role. And importantly, the outlook for the future plays a role. Obviously Moodys is not confident in the future of the Bahamas economy nor the state of our current financial affairs, nor the ability of the Bahamas gov. to turn things around.

The economy has been poorly mismanaged. And just look at Bahamar.. A private investor invested 900 odd million into it and look what happened... What kind of signal does that send to other people deciding whether they should invest their money in the country or not?? I am not surprised at all.

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OMG 3 years, 11 months ago

Can you imagine the comments if a downgrade to Junk status is made. Fred Mitchell "They don't know what they are talking about" DPM." This really is a blow to our economy" PM. "I promise you that in 6 months we will be upgraded"

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BahamaPundit 3 years, 10 months ago

If only our leaders would just read. A B rating does not refer to a default but a heightened risk of default. A D rating confirms a default has in fact happened. So, merely being slashed to junk bond status does not correlate with a previous default. No wonder we are in such a mess if our leaders can't even google simple research before espousing their views in the media. See the following:

http://mockingbird.creighton.edu/engl...">http://mockingbird.creighton.edu/engl...

Because a B rating is the single most common rating found in a junk bond portfolio, Moody's definition of its B rating follows:

Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.

To resume with Standard & Poor's:

CCC: Debt rated CCC has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal.

D: Debt rated D is in payment default.

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John 3 years, 10 months ago

Well the UK lost its AA rating in what seems like minutes after its successful referendum to withdraw from the European Union (after having it for 58 years) and Jamaica is facing further threats of downgrade after it was talking about leaving CariCom. Can anyone explain why when you use a credit card online or in some US stores they ask if you are paying in US or Bahamian dollars. The prices in Bahamian is like $1.03 on the US $1.00 But yet when you get your credit card statement the bank still charges you conversion on all foreign purchases So you end up losing like 4-6 cents on every dollar spent overseas.

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ThisIsOurs 3 years, 10 months ago

"There’s no way in my estimation, and in many other people’s estimation, that the Bahamas can be ‘junk’, and Barbados and Jamaica can’t.”

That may be the key to what he's saying. Basically it wouldn't be fair if we went to junk status if they're in a worse position than us but they're not junk status. Should have gotten a little more prominence in the story.

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banker 3 years, 10 months ago

Here is the difference for Barbados (according to Scotiabank Capital exec summary):

The governing Democratic Labour Party (DLP), led by Prime Minister Freundel Stuart, is expected to remain in office until the next election in 2018. The administration remains committed to fiscal consolidation, trade diversification, and crime reduction

The Bahamas and PLP remain committed to corruption, kleptocracy, lies, pocket-lining and bumbling incompetence.

I think that the rating system is based on reasonable expectation. It is obvious that the Christie government is still spending like drunken sailors on shore leave, while more intelligent regimes in Barbados and Jamaica realise that one must "do something" to alleviate the economic stresses.

Simply mouthing platitudes and doing nothing will require any economic forecaster to sound the alarm with a degraded rating, rather than waiting for the actual default to happen.

The difference between Barbados and Jamaica compared the Bahamas is that those countries have instituted measures that are producing "some" results. Perry Windbag is doing nothing but spending the country into oblivion.

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Honestman 3 years, 10 months ago

I say to all of you who voted PLP at the last election: what the hell did you expect?

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bogart 3 years, 10 months ago

The TDSR total debt service ratio being 25.8% and given that is is roughly half of the Bank's TDSR which is 40-45% should not be looked at by itself because the remaining 55% is the critical component as the customer has to survive pay bills etc. Not many applications examined this 55% aspect which can be proven to be a significant contributing cause of many defaulted mortgages.

The focus by mortgage bankers was to make the quota of mortgages, bonuses, positive staff assessments etc and also many applications were skimpy contributing to likely defaults on marginal loans -up to 95% financing The current application process is more thorough. Other factors may include errors by bankers as noone is perfect, contractors etc. A thorough investigation is needed before mortgage assistance should be done to see who is liable and excellent likelihood more than 1,000 can be helped.The 25.8% looks good but the other factors are important.

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