The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government faces “increased risk” by issuing an $800 million US dollar bond, a former finance minister yesterday suggesting it instead target $1.7 billion in local excess liquidity.

James Smith, who ran the Ministry of Finance from 2002-2007, told Tribune Business there was a strong argument for first “mopping up” the surplus assets in the Bahamian commercial banking system before borrowing on the international capital markets.

He explained that this would encourage Bahamian banks to increase the near-rock bottom deposit rates that have been “punishing savers”, and “relieve pressure” on the sector caused by an inability to find new lending opportunities and qualified borrowers.

Conceding that the former Christie administration may have “made a mistake” with its foreign currency borrowings, Mr Smith reiterated that the Bahamas needed to keep such debt - as a percentage of the total - “as low as possible” to minimise pressure on the external reserves.

He added that the Government would find it much easier to negotiate a debt restructuring, should it become necessary, if the vast majority of its creditors were Bahamian, and warned that increased foreign currency debt servicing costs could “crowd out” essential imports.

Mr Smith acknowledged that his views should be treated with “caution” as the rationale for the Government’s planned foreign currency borrowing is currently unknown, and he recalled how such moves were “well thought-out” when he led the Ministry of Finance.

However, with the Bahamas still struggling to get its deficit and national debt under control, the Minnis administration’s decision to tap the international capital markets for such a large debt facility has surprised many observers.

The latest data from the Central Bank shows that excess commercial bank liquidity, representing assets available for lending, increased by $260.3 million for the nine months to end-September 2017, and the former finance minister suggested the Government look here first.

“At this point in time I’d try to mop up as much of the excess liquidity as you can,” Mr Smith told Tribune Business. “The surplus funds have grown very high. It would be good to mop up some of that.”

With commercial banks risk averse, and unable to find qualified new borrowers, excess liquidity grew from $1.432 billion to $1.707 billion during the 12 months to end-September 2017. With banks increasingly reluctant to accept new deposits (liabilities), Mr Smith said savers were effectively being penalised by the near-zero interest rates on offer - something a local government capital raising might help alleviate.

“It would provide additional revenue for the banks, and they might be able to push up deposit rates,” he told Tribune Business. “At the moment we’re punishing savers, and we want to do just the opposite.

“One way to do that is absorb some of the liquidity that can’t be lent out because of risk aversion, due to banks’ problems with non-performing loans. From my point of view, it would be worthwhile to examine how much of the new money we’re going out for is available locally, as it will pick up deposit rates for savers, and we want to encourage saving in any economy.

“It would also relieve pressure on the banks, helping to normalise the sector and getting them back to what they ought to be doing, which is lending money for mortgages and small and medium-sized enterprises.”

Mr Smith also suggested that the low returns on bank deposits could drive pension funds, insurance companies and other institutions seeking long-term assets to seek out riskier investment vehicles to meet their targets.

Had the Government come to the local capital markets, he argued that it could have assisted pension funds and others to match their long-term liabilities to bonds of varying maturities.

“I guess they have their reasons, but from my vantage point if we have excess liquidity in the system the idea would be to absorb that,” Mr Smith reiterated. “I caution my remarks, as they may have very good reasons for doing it, but looking at it from the outside I think some effort should have been made to mop up excess liquidity first.”

Tribune Business exclusively revealed on Monday how K P Turnquest, deputy prime minister, and Marlon Johnson, the Ministry of Finance’s financial secretary, are both on a week-long trip through the world’s financial capitals to raise investor support for the proposed $800 million borrowing.

This newspaper reported that only $550 million of the proposed $800 million bond facility is likely to be ‘new money’. The balance is likely to be used to repay the $250 million short-term loan that Deutsche Bank gave the Government on September 14, 2017.

Explaining the rationale for raising debt financing outside the Bahamas, several sources said that given the size of the 2016-2017 fiscal deficit left by the Christie administration and the borrowing needs for 2017-2018, the Government felt it would have to seek at least $500 million on the international markets.

With total borrowing needs estimated at $722 million for the combined two fiscal years in the May Budget, the belief was that the Bahamian capital markets may only be able to provide a limited amount - especially since the likes of banks and insurance companies have restrictions on how much government debt they hold, and some may be reaching that limit.

The Government’s borrowing requirement, though, may have increased considerably as a result of the 2016-2017 fiscal deficit increasing from the initially projected $500 million to almost $695 million - a rise of almost $200 million.

Mr Smith yesterday said a key question was how much of the $800 million facility will be used to repay existing foreign currency debt, as opposed to adding to the $7.2 billion-plus national debt.

He argued against foreign currency borrowing simply for the sake of boosting the Bahamas’ external reserves, which stood at $1.064 billion at end-September 2017.

“It might have been a mistake in the previous administration when it went out for foreign currency borrowing,” Mr Smith told Tribune Business. “If it’s not for a specific project, it becomes Balance of Payments support.

“You have to pay it back in US dollars, and you might be crowding out imports needed to run the economy. We’re not seeing any major injection of foreign capital from tourist expenditure and foreign direct investment. By piling on more and more foreign debt you’re increasing your risk.”

Central Bank data for end-June 2017, the latest available, revealed that the Government’s total foreign currency liabilities were then equivalent to 26.8 per cent of the direct charge on government, standing at $2.641 billion. The national debt stood at $7.263 billion at end-June 2017, and this financing will likely push it close to the $8 billion mark.

Capital markets sources estimated that the new borrowing would take the Bahamas beyond the 30 per cent threshold, while the Democratic National Alliance (DNA) provided a less conservative estimate of almost 40 per cent of the Government’s direct debt.

Arinthia Komolafe, the DNA’s deputy leader, raised the same questions as Mr Smith, challenging the Government’s decision to “choose international borrowing over domestic borrowing amidst elevated liquidity”.

She also asked whether the Government has established an “upper limit” for foreign currency debt as a percentage of the total, and what the likely cost (interest rate) attached to the $800 million facility will be given the Bahamas’ current ‘junk’ credit rating with Standard & Poor’s (S&P) and recent avoidance of the same with Moody’s.

“Has a thorough impact analysis on external reserves, inclusive of meeting import demands and sustaining parity with the $US in the medium to long-term, been conducted considering reduced FDI and vulnerabilities within key sectors of our economy?” Mrs Komolafe asked.

“After six months in office, and during execution of austerity measures which include lay-offs in the public sector and a 10 per cent cut across the board in government spending, the current FNM administration is yet to produce for the Bahamian people a comprehensive strategy to grow the economy.

“This administration seems to be on the same ‘Tax, Spend and Borrow’ trajectory as its predecessors. It is common knowledge that austerity measures alone will not improve the economic state of our nation, nor will it pay for the additional $800 million that this administration is seeking to place on the backs of the Bahamian people, effectively mortgaging our children’s future.”

Mrs Komolafe also warned that the Government’s new borrowings would further add to debt servicing costs that are already the biggest line item in its Budget at $292.485 million, potentially sucking money away from services such as health, education, social services, the police and national security.

Mr Smith, meanwhile, added: “Generally, as best you can, you want to keep the foreign component of the national debt as small as you possibly could.

“You have more leverage with the Bahamian dollar component because that is held by institutions like NIB and the banking system, and in the event you run into a rough period it’s easier to reschedule given that it’s your own currency within your own borders.”