By NEIL HARTNELL
Tribune Business Editor
Hurricane Dorian was yesterday branded “the perfect storm” to derail an economic and fiscal turnaround that the government wanted to be natural disaster-free for “at least another year”.
KP Turnquest, deputy prime minister, told Tribune Business that the devastating category five storm represented “a significant setback” to the Minnis administration’s efforts to “firmly establish” its Fiscal Responsibility framework and consolidation plan.
He revealed that it was likely that the government will have to borrow beyond its 2019-2020 budget-approved limits to finance Dorian restoration, although local - as opposed to foreign currency - debt-raising operations “would be our preference”.
While unable to provide figures for Dorian’s likely damages and the amount of extra borrowing the government will have to undertake, as this is still being determined, Mr Turnquest said it did “not at all” anticipate it would have to seek “debt forgiveness” or rescheduling from local and international creditors for its $8bn-plus liabilities following the storm.
He added that The Bahamas was “a very long way” from having to undertake such drastic measures, or seek assistance from the likes of the International Monetary Fund (IMF), even though one of his predecessors as minister of finance suggested that such pressures now exist.
James Smith, who held the post during the 2002-2007 Christie administration, told Tribune Business in a recent interview that both the fiscal deficit and national debt were likely to significantly increase in Dorian’s wake due to the combination of restoration spending demands and reduced tax revenues imposed on the government.
While acknowledging that the government has to meet the “essential needs” of its people, and repair public infrastructure, Mr Smith warned: “We have to be careful how we manage this... and not need to go to the International Monetary Fund, which is something we’ve avoided up until now.
“It’s extraordinary,” he added of Dorian’s devastation. “I totally sympathise with the position they’re in. It’s something nobody could have predicted. It’s going to take forbearance on the part of the entire population for the next three to four years.”
While the full scale of Dorian’s impact is unlikely to be revealed before the mid-year budget in February next year, along with the next quarterly fiscal update, Mr Smith said The Bahamas still had some breathing room due to the fact that around 30 percent of its debt is denominated in foreign currency.
“It’s really managing that and trying to avoid reaching that critical point,” he added. “Some of the international debt we ought to approach for forgiveness or rescheduling. We have some debt with the Chinese for the roads and the Inter-American Development Bank.”
Mr Turnquest, while emphasising that the Government was far from taking such measures, conceded that Dorian had dealt a significant blow to almost all aspects of the economy and public finances.
“It’s a significant setback,” he told Tribune Business, “and one that I’d hoped to get through at least another year without so we could set in place and firmly establish the Fiscal Responsibility parameters, but we don’t control the wind.
“Yet we have to deal with it. We’ll look at our fiscal plans, adjust them as necessary, account for it, and plot a path to get us back on track as soon as possible.” The deputy prime minister had previously said the Government’s finances were one Dorian-style hit from disaster, and that fear has now struck and become reality.
The Fiscal Responsibility Act mandates that the Government achieve a fiscal deficit equivalent to 1 percent of Bahamian gross domestic product (GDP), or $137m, for 2019-2020 but that target will inevitably be breached due to Dorian’s shock to the economy and wider society on Abaco and Grand Bahama.
Asked whether the Government will have to increase borrowing beyond parliamentary-approved limits, Mr Turnquest told Tribune Business: “We’re still working that out. Chances are that we will have to based upon the initial analysis. Again, that is something to consider once the full impact is known.
“We believe we’re going to be able to fund whatever we need to fund through the drawdown on the contingent line [the $100m IDB credit facility] we have, as well as the local market should the need arise. We believe we are comfortable in that envelope and will respond to whatever the needs may be.”
The Government can access ample excess liquidity in the commercial banking system, which stood at $1.855bn at end-July 2019. External reserves, too, were relatively healthy, standing at $1.583bn at the same time, and will likely gain a further boost from the multi-million dollar foreign currency reinsurance inflows that will materialise once claims start to be paid.
But, with much of Abaco’s economy totally obliterated by Dorian’s winds and storm surge, and Grand Bahama severely crippled, The Bahamas has - for the moment - lost the islands that were its second and third largest economies.
The reduction in economic activity will depress government tax revenues below projections, and this income will be further impacted by the tax breaks, incentives, and exigency orders granted to facilitate the rebuilding and restoration process in those islands.
Besides the revenue hit, the Government will also likely have to spend a nine-figure sum on restoring public infrastructure - roads, docks, bridges, airports, healthcare, water and electricity systems - in Dorian’s wake.
Much of this will be uninsured, including Bahamas Power & Light’s (BPL) transmission and distribution system. The state-owned utility’s cash-strapped state means that it will likely have to rely at least partially on the Government to finance repair costs that Paul Maynard, the Bahamas Electrical Union Workers (BEWU) president, yesterday suggested could hit $80-$90m on Abaco compared to BPL’s initial $20-$30m estimate.
Mr Turnquest yesterday acknowledged the possibility that BPL will need financial assistance from the Government to fund restoration, although he suggested it could get “wrapped up” in the proposed $450-$550m Rate Reduction Bond refinancing if the timing proved right.
Meanwhile, with much of Abaco’s population evacuating in Dorian’s wake, The Bahamas also faces the problem of finding jobs for the island’s 14,000 strong labour force and those who have left Grand Bahama - many of whom may elect never to return.
This, in turn, will increase the strain on the Government’s social security budget and the National Insurance Board (NIB), the latter of which will be faced with a significant spike in unemployment benefit claims.
Robert Myers, the Organisation for Responsible Governance’s (ORG) principal, told Tribune Business that Dorian’s total damages and economic losses have “got be in the billions”.
Describing the economic and fiscal fall-out as being “of great concern”, he added: “It’s going to be a real struggle and we will have to borrow money. We’ve lost the second and third largest economies, and have to re-stimulate. BPL will not be able to pay for it; Water & Sewerage, those guys will need money to fix it.
“It’s the perfect storm and the big one. It’s a question of how we manage our way out of it, and be smart about it. I would not want to be this administration. No doubt it’s going to have a big impact on our fiscal viability and sustainability. It’s very, very worrying. It’s a mammoth task getting your head around what it’s going to cost.”