By NEIL HARTNELL
Tribune Business Editor
The Central Bank could have headed-off its $2bn bank liquidity concerns had it advised the Government against heavy foreign currency borrowing, an ex-governor argued yesterday.
James Smith, also a former finance minister, told Tribune Business that it "didn't make any sense" for the Minnis administration to use proceeds from last year's $750m US dollar bond issue to pay off short-term Bahamian dollar debt.
He argued that this had merely worsened the already-huge build-up in surplus commercial bank assets, resulting from the industry's reluctance to lend and inability to find qualified borrowers, thereby contributing to a growing risk that the Central Bank is now sounding alarm over.
"Excess liquid assets" in the banking system stood at $1.987bn at end-June 2018, sparking the regulator's warning that this could fuel an "unsustainable acceleration" in credit issued to Bahamian consumers and businesses unless properly managed.
The Central Bank, in its June report on economic developments, said such a surge in borrowing would immediately deplete The Bahamas' foreign currency reserves unless outflows were matched by improved earnings from tourism and other hard currency sectors.
"The Central Bank is also cognisant that the high level of liquidity in the banking system could fuel unsustainable acceleration in private sector credit over the medium-term, or for external portfolio investments, with negative implications for external reserve balances in the absence of further strengthening in the performance of the foreign exchange earning sectors," it warned.
"The Bank is therefore sustaining its focus on liquidity reduction by further decreasing its holdings of Government debt. The Credit Bureau framework, now having cleared critical regulatory hurdles, will also instill a more disciplined environment for lending growth over the medium-term."
Mr Smith said a "medium-term" scenario typically referred to a period five to seven years out. To ensure a soft landing, rather than the "worst case scenario" outlined by the Central Bank, Mr Smith said the authorities needed to ensure credit was channelled to the productive, foreign exchange-earning sectors of the economy to create jobs once the banks started to lend again.
With the Central Bank now focusing on a concern he identified last year in the aftermath of the Government's $750 million bond issue, Mr Smith said of the regulator: "They should have advised the Government about going out and borrowing in US dollars, when they already had excess liquidity in the system, and using it to pay local bills. It didn't make any sense."
Arguing that the Government had been "suckered" into borrowing more than it should, Mr Smith said that while the proceeds had boosted the Central Bank's foreign currency reserves this was an "artificial" improvement not driven by any expansion in tourism and other exchange-earning industries.
He warned that this could result in "a mismatch of currencies", creating pressure on the external reserves when it comes time to repay foreign currency borrowings, with the excess liquidity also depressing the interest rates paid by banks to depositors.
Arguing that this all stemmed from "bad fiscal and monetary policy", Mr Smith said: "Because you're punishing savers by paying little or no interest, they put their money into riskier investments. Savers are being exposed to actions they may not necessarily take.
"The banks, having been bitten by the non-performing loans or arrears, they're pretty reluctant to lend or are only lending to their 'A' customers. But there's still the 'B' and 'C' customers, and I suspect they're borrowing from private lenders.
"They [the Government] also propped up artificially the Central Bank reserves, which paints the country and Central Bank as being able to rest on their laurels, but they didn't earn that. That's not net foreign earnings," he continued.
"If the banks unleash the spigots and begin to lend again, the reserves could run down really rapidly.... It's a reflection of the conversion of the [$750 million] foreign loan, and a reflection of the banks' reluctance to lend."
Mr Smith said the near-$2 billion excess bank liquidity was "the symptom" of the industry's inability to find qualified borrowers. The size of its surplus asset pile, representing funds that commercial banks want to lend but cannot, meant the Bahamian private sector was not accessing sufficient debt capital to fund expansion and job-creating investments.
He added that policymakers' priority should be to "mitigate the fears of the banking system", which he branded "the root of the problem", and ensure there was a soft landing on "excess liquidity" through the extension of credit to Bahamian businesses.
"The savers are paying the price," Mr Smith reiterated, "the very people we want, as they are the mirror image of investment. It's hurting pension funds, especially those people retiring soon and expecting a return.
"This thing is playing out, and this is the first time the Central Bank has recognised there's a potential problem, but it needs an urgent solution. The Central Bank needs to monitor when the banks loosen up, because it will have a direct impact on the reserves and create another problem when we have a drain because of fast expansion."