By NEIL HARTNELL
Tribune Business Editor
nhartnell@tribunemedia.net
Royal Bank of Canada (RBC) has warned that the Bahamas’ debt-to-GDP ratio continues to increase beyond the so-called 70 per cent ‘danger threshold’, with business leaders agreeing that international concerns are valid.
RBC, in a January 2016 report, pegs the Bahamas’ debt-to-GDP ratio at 76.5 per cent at end-September 2015, having grown by 8.5 percentage points or over $500 million year-over-year.
Its January 2016 report on the Caribbean economies said that based on Central Bank of the Bahamas’ data, “total public sector debt expanded by 8.5 per cent year-over-year - from $6 billion in the 2014 third quarter to $6.51 billion in the 2015 third quarter - which equates to roughly 76.5 per cent of the IMF’s 2014 GDP data”.
RBC’s estimates are in line with those previously released by the Central Bank, which revealed that the Bahamas’ debt-to-GDP ratio was 73.4 per cent at year-end 2014.
The Government’s own bank has thus concluded that the Bahamas’ debt-to-GDP ratio is continuing to grow, albeit at a more modest pace since Value-Added Tax’s (VAT) introduction, an assessment supported further by this week’s mid-year Budget data.
And the ratio also remains stubbornly above the 70 per cent ‘danger threshold’ identified by the International Monetary Fund (IMF).
As countries go increasingly beyond that ratio, as the Bahamas now appears to be doing, ever-increasing interests service costs threaten to suck them into a deepening ‘debt spiral’, where they are forced to borrow to meet existing obligations.
Gowon Bowe, the Bahamas Chamber of Commerce and Employers Confederation’s (BCCEC) chairman, told Tribune Business that Moody’s criticism of this nation’s increasing debt was natural and justified.
The rating agency, in its latest assessment, expressed concern that while the $6.5 billion national debt’s growth rate had slowed, it was still expanding faster than the economy.
“On the debt acceleration, it was a natural criticism because, in reality, the medium to long-term fiscal consolidation plan has been delayed to a certain extent,” Mr Bowe explained.
He added that the delay stemmed from the six-month push back of VAT’s implementation, and the fact the insurance sector was ‘exempt’ from the new levy for a further six months.
“Then, in reality, we have not seen the expenditure containment that had originally been set out,” Mr Bowe told Tribune Business.
He acknowledged the mid-year Budget figures, which show that the Government ‘blew past’ its forecast $141 million fiscal deficit for the full year in just six months.
Having accumulated $157 million in ‘red ink’, the Government is faced with having to achieve a $16 million ‘surplus’ in the six months to end-June 2016 if it is to hit its projections.
But ‘surpluses’ have been historically difficult for the Government to achieve even when the economy has been performing well, and Tribune Business revealed earlier this week how its recurrent spending for the half-year was up by $200 million or more than 23 per cent.
Determining what exactly has driven the year-over-year spending increase is difficult, as the mid-year Budget data does not completely break down every ‘fixed cost’ line item, such as salaries, rents and debt servicing.
The Government also reclassified certain expenditures from its capital account to the recurrent side during the 2015-2016 Budget, as it moves to comply with international public sector accounting standards.
With the reclassification, the Government was projecting a $254 million increase in recurrent spending for the full year to $2.098 billion anyway. Almost 80 per cent of that projected increase, though, has taken place in the first half of the Budget year.
Thus Moody’s suggestion that the Government rein in spending during the six months to end-June 2016 appears valid, based on the data released this week.
Mr Bowe, meanwhile, told Tribune Business that the Bahamas could not rely on increased economic or GDP growth to help keep its debt-to-GDP ratio in check.
“We have to be realistic in saying that fiscal debt management cannot simply be tied to relative items, in terms of hoping that GDP grows and thus debt becomes a smaller percentage,” he explained.
“We have to reduce the debt and start paying it back. We’re not the US; we have to pay our bills.... The global economy and bondholders do not have any pity on small nations.
“While we have this fear of foreign direct investment claiming the rights to the assets of the Bahamas, we have to be careful that, if we’re not prudent in managing our financial affairs, we give them away for the debt that we owe.”
Mr Bowe said the Bahamas needed to quickly “break out in terms of becoming a ‘Tiger economy”, and determine how it could achieve higher growth rates than the 1.5-2 per cent projected over the next two years.
Prime Minister Perry Christie acknowledged in the House of Assembly on Monday that the Bahamas’ economic growth had been “more muted” than forecast, both by the Government and IMF.
The Fund’s original forecast of 2.3 per cent growth for 2015 has been shaved all the way down to 1 per cent, and Mr Bowe added: “My question would not be so much for the Prime Minister but the IMF.
“When will you be under-shooting on projected growth rates? You’ve always been over-shooting on growth for the past three years.”
Mr Bowe said the latest Moody’s assessment was “positive” for the Bahamas, given that the rating agency was holding to its position of August 2015 and “not overplaying” Baha Mar’s impact.
“I think they gave credit where credit was due, in terms of certain things and initiatives, and criticism where there needed to be,” the Chamber chairman added.
Comments
Well_mudda_take_sic 8 years, 1 month ago
The only equation Bowe seems to understand and appreciate as a myopic accountant is that assets minus liabilities equals owners' equity. His education obviously did not extend to learning that a corrupt government plus more taxes equals greater deficits and increased national debt. Even now, after having been an ardent supporter of the implementation of VAT and watching how our VAT dollars have been squandered by the corrupt Christie-led PLP government, Bowe still doesn't get it!
Reality_Check 8 years, 1 month ago
You're absolutely right about this. The more tax dollars fed to a corrupt government, the greater its propensity to borrow and the more likely lenders (like the World Bank, IDB, IMF, etc.) will seek to have the corrupt government over-extend itself through the taking on of additional loans that do not serve the borrowing country's interests. This is a simple fact! The developed countries long ago realized that the best way to acquire or control the natural resources of third world countries on the cheap is to foster the corruption of their governments and than saddle their citizenry with excessive debt through the international lending agencies controlled by the developed countries.
Well_mudda_take_sic 8 years, 1 month ago
You need to spend much more time reading good meaningful literature and much less time spewing bad meaningless comments (often laced with salty rhetoric) on web sites like this one. Many have by now relegated you to the same dust bin that Tal and Birdie were long ago tossed into. Frequently you come across as being very much like a cork pulled half way out of an expensive bottle of champagne that then gets violently shaken to the point where the cork.......oh well, you get the idea!
SP 8 years, 1 month ago
.... Nothing to worry about! P.M. Perry Gladstone Christie promised to "soften the blow"....
bahamalove 8 years, 1 month ago
That debt ain't slowing down anytime soon because elections are coming up and traditionally the government in power goes on a spending spree to curry favour with the electorate. The IMF already packing their bags for their 'vacation' to the Bahamas.
asiseeit 8 years, 1 month ago
This is the real news today and it should make each and all shudder! We are broke with no growth except TAXES to pay off our ever increasing DEBT. Bahamians get ready to be raped and pillaged by the government of The Bahamas. This is the only way these morons know how to operate, corruption, mismanagement, graft, outright theft, and the list of nefarious deeds goes on. Your money is no longer yours, they coming to take it!
John 8 years, 1 month ago
The biggest shock will come when first quarter VAT returns are filed. This will show a contraction in the amount of VAT filed last year after the insurance companies contributions are deducted. It may also show a reduction in the number of businesses filing. Government cannot continue increasing taxes when there is no real growth in the economy. But the situation is not limited to the Bahamas. China's exports decreased by 25% in February under the previous year and declined for the thirteenth consecutive month, indicating that that country is in recession. While unemployment figures in the US are at their lowest in 10 years, consumer confidence and consumer spending are also at extremely low levels. This is despite consumer prices and commodity prices also being at record lows. Gas and Oil prices especially. And prices are expected to go even lower as Iran starts selling oil and since there is an abundance of natural gas on the market. The biggest problem for the Bahamas should there be another worldwide recession is that very little recovery was made from 2008. The government is up to its eyebrows in debt, unemployment remains drastically high, many home owners have lost their homes or are in arrears on their mortgages and businesses, many are saddled with old debt, increasing taxes and zero profits. Food prices are incredible. Government did very little to stimulate the economy and their ability to borrow and pile on more debt is becoming beyond the ability to pay back.
John 8 years, 1 month ago
If government had spent $20 million of the money it spent on BAMSI to assist existing farms increase their output and increase their distribution it could have put a significant dent in the food import bill. And since there are so many persons on the Food Assistance Program, why not give out vouchers so that these recipe ants get local produce as part of the program. There are tinned and tinned of produce going to waste every month and since the government has to pay the farmers for at least some of it why not put it to use? The quality of the produce is not bad and the only thing that may be required is more distribution points.
Emac 8 years, 1 month ago
Excellent point!
happyfly 8 years, 1 month ago
Our government is boasting that is has reduced the annual deficit after spending it's entire annual budget by mid year. I would trust a crack addict better with my hard earned tax dollars. RBC and all the other banks must be smoking crack too if they think this government or anyone else in this country are going to be able to service their obligations when growth is barely 1% and interest rates are 4 to 10 times that number. By not dropping these rates, the people who can afford to pay right now are being strangled and when the government raises taxes next go around, a whole other round of defaults and foreclosures, and then they strangle off the next level of people affording to pay off their mortgages.
Oh.....unless there is a miracle
happyfly 8 years, 1 month ago
The cold harsh reality of the banking world is that central and commercial banks work together to keep interest rates at as high a level that they can (for profits) without caving the market place in on itself. In most intelligent financial market places, the banks gauge how many people can afford their mortgages and how many people are defaulting and adjust the interest rates accordingly. The fundamentals of floating interest rates say that 97% of the bank's customers paying 5% interest is better than 80% paying 5.5%.
For some reason in this wee country the central and commercial banks seem to think 40% of it's customers paying 8% is a good end game. Perhaps when the Bahamian economy caves in on itself, RBC knows it can sell all it's junk debt to the Chinese and go back home to Canada ?
Entrepreneur 8 years, 1 month ago
Totally agree with happyfly.
As a former banker from a G8 country I know that banking has to be sustainable and in alignment with the long term needs of the civil society in which it operates, for both the banks and the society/ country to benefit.
Yet the recent concerns of ridiculous spreads on interest rates and the negligence and arguably much more serious wrong doing exposed by the Malcolm Spicer case shows to just blame Bahamians is not only one sided but not in the banks' interest either.
Now that the Spicer lawyers at MERIDIAN LAW CHAMBERS, and before them CALLENDERS, have filed publicly available affidavits revealing potentially very serious wrong doing, including raising the question of a bank lying under oath - it has to be time to reset this discussion to have a more sobre and realistic appraisal of how to make Bahamian society grow sustainably.
The Spicer case how now led to approaching 500 people signing the petition for better treatment form the banks in just a couple of weeks
http://www.ipetitions.com/petition/ba...">http://www.ipetitions.com/petition/ba...
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