The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Foreign holdings of the Bahamas' sovereign debt are higher than "the manageable range" targeted by a former finance minister, who fears this could increasingly drain the external reserves.

James Smith, also an ex-Central Bank governor, told Tribune Business he would "prefer" the Government's foreign currency debt, as a percentage of its total $7.052 billion national debt, to remain below 25 per cent.

However, Central Bank data shows that the Bahamas' total foreign currency debt had already breached this ratio by year-end 2016, standing at $2.645 billion or 29.3 per cent respectively.

The proportion of government debt held by private foreign investors and multilateral institutions accounted for the majority of this, some $2.37 billion or 26.2 per cent, placing them above Mr Smith's target ratio alone without even including the small portion held by domestic institutions.

The former finance minister, in a recent interview with this newspaper, urged the Bahamas to keep its foreign currency debt - and especially the portion held by foreign investors - as low as possible.

Mr Smith added that in a 'worst case scenario', if the Bahamas needed to restructure or reschedule its debt it would find it much easier to negotiate such with Bahamas-based - rather than foreign - creditors.

Emphasising that he believed the Bahamas was "quite a way off" from this, Mr Smith said of the foreign currency debt: "We want to keep that down for many reasons.

"It's still in a manageable range, but I'd prefer it to not be higher than 25 per cent. I'd prefer it to be lower."

Overseas holdings of the Bahamas' foreign currency debt breached the 25 per cent threshold in 2016, and remained relatively constant through early 2017, closing the first quarter at $2.642 billion.

However, the Central Bank's 2016 annual report revealed that foreign currency debt servicing payments rose by 82.8 per cent or $152.8 million last year to hit $337.4 million. And they also increased by $8.3 million or 17.5 per cent to hit $56 million for the three months to end-March 31.

Mr Smith said increased foreign currency debt servicing payments were worrisome because they sucked money from the external reserves, and reduced the amount of foreign exchange available for physical imports.

"In our case it has a lot to do with the current account and maintaining parity with the US dollar," he told Tribune Business. "The Central Bank reserves are used to cover the big gap in the current account, and allow us to import on a one:one basis.

"That becomes weaker the larger the portion of foreign debt is to the overall debt. Foreign currency that is normally used for importing and feeding the population now goes to debt servicing."

He added: "You really don't want debt payments eating up all foreign exchange reserves that you use for all the imports. It's such an open economy that we have to import from the US to feed our tourists.

"If that is ever constrained because we are using that money to pay debt, we will be unable to satisfy the requirements of our major industry for imports. You really don't want to be using that hard currency for servicing debt."

Mr Smith said that apart from monetary pressures, the Bahamas also needed to keep its foreign-owned relatively low should a restructuring ever become necessary.

"Foreign bond holders are less likely to be amenable to reorganising if you have to reschedule your debt," he told Tribune Business. "Most of the Bahamian dollar debt is held by national institutions, such as NIB and the banks.

"If necessary, they could probably sit down with them and stretch it out some to service the debt more effectively." Jamaica did exactly this several years ago with its Debt Exchange Programme, which swapped existing notes for ones that held longer maturities and lower interest rates, thereby reducing debt servicing costs.

Mr Smith, though, reiterated that despite the threatened Moody's 'junk' downgrade' the Bahamas has some distance to travel before such a debt restructuring - let alone a default - becomes necessary.

"In my view we're quite a way off," he told Tribune Business, "because the one thing we have not looked at is, in a worst case scenario where it is difficult to meet debt payments, what are our assets?

"We have a lot of government assets that could be sold. It may be time to look at our big holdings to see if we can sell or securitise them."

Apart from Crown Land, and publicly-owned infrastructure and buildings, the former Central Bank government said holdings such as the Government's 40 per cent equity stake in Arawak Cay Port Development Company (APD) could be relatively easily disposed of.

Mr Smith also pointed to the Government's 100 per cent stake in the Lynden Pindling International Airport (LPIA) and its operator, the Nassau Airport Development Company (NAD), as another marketable asset.

He recalled how NAD's operator, the Vantage Airport Group, had initially sought an equity stake only for the Government to rebuff this and opt for a management agreement instead.

Mr Smith implied that NAD's $409.5 million revamp had created a valuable asset of interest for private investors, and suggested that it was worth exploring whether Vantage wanted to upgrade from a management to equity partner.

"There are a huge amount of government assets all over the place, such as waterfront buildings like Lands and Surveys," he told Tribune Business.

"If we do an inventory of assets, fixed and buildings, there are a lot of things of value just sitting there that can be privatised or outsourced. All these things are potential contingencies to default."