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'Death Spiral': Shocks Put Debt At 100% Gdp

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas could be locked into "a death spiral" by 2022, with its national debt virtually equal to total economic output (GDP), if it fails to hit growth and fiscal consolidation targets.

The International Monetary Fund (IMF), in its full Article IV report on the Bahamas, warned that "persistent economic weakness" and a failure to achieve fiscal consolidation would take the national debt perilously close to 100 per cent of GDP within five years. Warning that the risks surrounding debt sustainability were tilted towards the "moderate to high side", the IMF's modelling projections showed the national debt, as a percentage of GDP, heading towards 100 per cent should the Bahamas suffer adverse economic or hurricane-related shocks.

"Overall, the heat map points to moderate to high risks to debt sustainability, underscoring the urgent need for fiscal consolidation, complemented with structural reforms to lift potential growth," the IMF concluded.

The Fund, likely using Bahamian GDP data from before the Department of Statistics' recent 28 per cent upward revision to $10.22 billion, projected that the debt-to-GDP ratio will peak at 73.3 per cent this fiscal year in the absence of any external shocks. However, a failure of the Minnis administration's economic and fiscal policies would see a continual increase in the $7.2 billion national debt. Keeping the projected primary deficit at this fiscal year's 2.6 per cent of GDP resulted in a debt-to-GDP ratio of 91 per cent come 2022, the IMF revealed. And, employing the past decade's average -0.1 per cent GDP growth and -2.1 per cent primary deficit resulted in a debt-to-GDP ratio almost equal to the size of the Bahamian economy.

"Under this severe adverse scenario, the debt burden would rise sharply to close to 100 per cent of GDP over the medium term, with gross financing requirements also rising to 11 per cent of GDP," the IMF said.

The Bahamas' fared slightly better in the 'hurricane scenario', which simulated a strike from a storm stronger than Hurricane Matthew. "Staff assumed a temporary reduction in real GDP growth of 0.5 per cent for fiscal year 2018 and fiscal year 2019," the IMF said.

"With lower tax revenue and larger fiscal spending due to post-hurricane reconstruction, the primary balance would worsen by 3.7 per cent and 0.8 per cent of GDP over the same period, and the debt would increase to 81 per cent of GDP by fiscal year 2022."

Robert Myers, an Organisation for Responsible Governance (ORG) principal, told Tribune Business that the IMF data showed how close the Bahamas was to "a death spiral" in relation to the public finances, especially if a natural disaster or economic crisis occurred.

He added, though, that the Fund's modelling and his own 'back of the envelope' calculations also revealed the same scenario - how the Bahamas could turn its fiscal crisis around by achieving faster GDP growth and eliminating the deficit, a combination that could reduce the existing $7.2 billion national debt.

"We've got to do the debt cutting and deficit reduction to stimulate growth, because at the current trajectory the Government is a drag on the economy," Mr Myers said. "That's exactly what's happening now.

"The Government is a drag on the economy, and we've got to reduce that drag. That's inefficiency, low productivity, wastage and shrinkage. The very people governing us is what is holding us back."

The Fund, in its Article IV report, suggested the Government could slash recurrent spending by just over $200 million, or 2.4 per cent of GDP, if it cut the civil service wage bill by $70 million; required public servants to contribute to their pensions; and reduced subsidies to public corporations by 1.3 per cent of GDP.

Turning the IMF's grim projections into a positive, Mr Myers added: "It just makes it abundantly clear that if we do the right thing; if we can get the albatross of government off our backs, improve the economy and the cost and ease of doing business, and convert some of these government jobs to private sector jobs through training and re-education, there is a chance.

"Sell-off some of those deadbeat entities the Government owns. Bahamasair, Bank of the Bahamas and ZNS don't have any value. They're not productive, have no return on investment. Let's shed them all."

Mr Myers acknowledged that "we can't do it in one swoop, as that will crash the economy" - a nod to the fact that the public service downsizing recommended by the IMF would cause enormous social and economic dislocation if done on one go. Unemployment would rise significantly, further depressing the economy by reducing disposable incomes and spending power.

"This is not a walk in the park," Mr Myers conceded. "We're going to feel some pain. We're already feeling it with high unemployment and crime, and an effective tax rate that's a lot higher than people say it is.

"But if we don't take that medicine now, we're going to be a fatality. As bitter as it may be, it's better than not taking it. That can change with 5 per cent growth, 2 per cent growth."

The ORG principal also urged the Government to "cap" the multi-billion dollar civil service pension liability, warning that the Bahamas "can't let that spiral out of control" and that it had to "stop the bleeding".

Comments

John2 1 week, 4 days ago

We have a 60/40 chance of beating the death spiral odds with the Red shirts in power the austerity measures will continue..Lets just hope that we dont have another very active hurricane season for a few years. Get the Ginn Sur Mer project going in west end. Open all of Baha Mar on schedule and fill the rooms. work on the ease of doing business in this country and lower the cost of electricity. If the USA passes its Tax Relief bill, american citizens should have more cash for traveling and a few companies may decide to invest here resulting with increased FDI investments in this country in the next few years.

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sheeprunner12 1 week, 4 days ago

The Minnis Cabinet have to be able to make hard decisions ......... if they do, they will win again in 2022 easily .......... Bahamians are begging this Minnis Cabinet to clean up and lean up the Central Government and at the same time, find some viable investment opportunities for the Family Islands (and promote re-migration).

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baldbeardedbahamian 1 week, 4 days ago

This has been coming for decades. Sir Etienne Dupuch used to write over and again that a people get the government that they deserve. We have elected stupid and corrupt people to be our government since indepencence, Does this mean we are a stupid and corrupt people? I hope not for my grandchildren's sake.

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Reality_Check 1 week, 3 days ago

The IMF, IDB et al. are experts on the death spirals of countries; after all they are the ones responsible for inducing such spirals by encouraging known corrupt politicians in governments like ours to take on unsustainable debt so that the well-planned goals of their lobbyists in the developed countries can be met on the cheap, i.e. the developing country like the Bahamas is made ripe for foreign corporate interests to swoop in and buy the most valuable national assets and natural resources at bargain basement prices.

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sheeprunner12 1 week, 3 days ago

Very true ........ that is why we need to hold the OECD/IMF/S&P/Moody's at arm's length ...... Thank them for their advice and govern responsibly FOR Bahamians

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concernedcitizen 1 week, 3 days ago

It is us that went hat in hand to beg and borrow ,no one put a gun to our head .Since independence w/ Cuba closed to the biggest tourist market to the north we have taking in enough money not to borrow one red cent ,except for vary very large infrastructure projects ., however b/c large scale corruption , out and out teefin from the treasury , contracts to unqualified family ,lovers and friends every year we have to beg and borrow hat in hand just to keep the lights on and pay the bills ,,

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Well_mudda_take_sic 1 week, 3 days ago

It is not "us", but very much "them". They create the environment and incentives for corruption to flourish at the highest levels of a developing country's civil service and executive branch of government. They do this by the type of projects they are willing to finance, the contractors of ill-repute that they are willing to let do the project work, the manner in which they release the loan funds for the project, their almost non-existent monitoring the process of projects, etc. etc. The name of the game is to incentivize borrowing for umpteen worthless studies, for infrastructural projects that are often unsuitable and heavily padded, for projects of any kind that will result in the unnecessary costly growth of government, and so on. Seldom will you see them get involved in anything meaningful that could prove problematic to the achievement of their ultimate hideous long term goals. This is why they do very little if anything that would help improve the standard of education for developing countries. They know that dumbed down politicians and civil servants are much more inclined to fall victim to the surreptitious way that they go about destroying the economy of a targeted nation. Think of their modus operandi as one big entrapment operation over many years aimed at bringing the targeted country to its knees. No, it's not us. Without them and their hideous agenda we would not be in the mess we are in today.

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Dawes 1 week, 3 days ago

Thats right blame the IMF and all the other foreign entities. It can't possibly be us Bahamians that are responsible for the position we are in today. It's not just the highest levels of civil service that is corrupt, it is all levels. And it is all of us who are to blame. We turn a blind eye to it, or participate in it when it benefits us. This could be not fully declaring all items we bought when shopping in the states, or buying a cashier lunch at a Government corporation for "quicker" service or a reduce fee. But thats OK for us to do, as we are beyond reproach. It must be the foreigners fault we are in the position we are in.And while we are at it, lets get those same foreigners and foreign entities to give us more money so we can go ahead and waste it and then blame them again as we continue to decline. Until Bahamians are willing to stand up and demand the Government takes some serious decisions in terms of expense reduction and or revenue increase nothing will change apart from us being one day closer to the day of reckoning.

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Well_mudda_take_sic 1 week, 3 days ago

Believe me, this is not at all about the 'blame game'. Sadly it's harsh reality. I would venture to say that you too cannot name a single developing nation with heavy IMF, World Bank, IDB et al. involvement/guidance that is successful today. On the other hand, the nations whose economies have been wrecked by the involvement/guidance of these international lending agencies are too many to name!

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Dawes 1 week, 3 days ago

Any nation with heavy IMF involvement means they are at the end of the line as the IMF is the last option for a nation to use. We thankfully have not had to go down that route, yet. The problem is these entities will come in a say what needs to be done to sort the finances out in the long run, without consideration of the people and the struggles they will have. This is the way they were set up. If we don't want to go down these routes we should stop spending silly amounts of money as we have been doing for 40 plus years, with little to show for it. I would understand if we had first class schools or hospitals but we don't. My point is the only people we have to blame our ourselves, we did not have to get so in debt but we were ok with doing so, it is only now that we have to take responsibility for this that we complain.

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Well_mudda_take_sic 1 week, 3 days ago

I don't think we're that far apart on how we see things, but I would be interested in knowing if you can name a single developing nation with a successful economic turnaround story that can be attributed to the IMF, World Bank, IDB or similar international lending agency.

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proudloudandfnm 1 week, 3 days ago

The problem we have now is the country is in desperate need of repair. Nassau needs about a quarter billion for electricity and Freeport needs to be revitalized. Our southern islands need hurricane repairs. Yes we have to curb spending but we have to spend to repair our country. This is an example of a rock and a hard place. You can't cut spending and ignore the needs of the country.

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Dawes 1 week, 3 days ago

I agree on this. But the only way not to cut spending or increase revenue and do what needs to be done is by borrowing. Unfortunately due to complete mismanagement we are coming to the end of us being able to borrow with no consequences. If we continue as is, we will soon be told to either cut spending dramatically or increase revenues. If we choose not to we will then only be able to borrow from people like the IMF and that will be on their terms and they will insist on the cuts.
I had hoped that this new Government would make the decisions needed to ensure that doesn't happen. However it is a mammoth task and i am not sure they are up to it, but i hope they are.

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SP 1 week, 3 days ago

Dumb Ingraham and dumber Christie should be tried for gross stupidity first, and treason second for "leading" the country into this $6Billion fiscal quagmire!

These two former PM's are either extremely stupid or worse.

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