In the second of a three-part series, Hubert Edwards analyses the challenges confronting The Bahamas as it seeks to secure sufficient funding to ride-out the COVID-19 storm.
Policymakers are dealing with an evolving crisis, a major aspect of which creates greater economic damage. The focus on time is multi-faceted and important for the Caribbean as countries start to make plans to restart their economies. As time drags on, we can anticipate that the crisis will impose a higher cost on funding the recovery. Moody’s indication that its rating for The Bahamas is under review for a downgrade, due to the fallout from COVID-19, is significant for the region. Moody’s statement that the decision “reflects significant risks to its economic and fiscal metrics as a result of the coronavirus outbreak” should cause many other countries to become very concerned.
Most countries within the Caribbean are rated as risky when it comes to sovereign debt. With the exception of the Cayman Islands, which has an excellent investment grade rating, The Bahamas and Trinidad & Tobago share the next highest ratings in the region, at “BB+” and “Baa3”, from Standard & Poor’s (S&P) and Moody’s, respectively. Both of these are considered “lower investment grade”. A downgrade for The Bahamas, therefore, holds very worrying implications for the rest of the region. With weaker economies, most could effectively be relegated to junk status. Many are already in the realm of being “highly speculative”, as is the case with Jamaica, or the lower level rating of “substantial risk”. A downgrade for The Bahamas by Moody’s will push its sovereign rating into the non-investment grade category, rendering it a higher risk and potentially pushing up the cost of borrowing significantly.
The average debt-to-GDP ratio for CARICOM countries stands at approximately 65 percent, ranging from a low of 33 percent (Haiti) to a high of 125 percent (Barbados). Adjusting for the two lowest countries, Trinidad and Haiti, this ratio increases to 78 percent. This number is significant. Using 60 percent debt-to-GDP as a benchmark that most countries wish to remain below, it indicates that most countries do not have the fiscal space they desire. For example, at the start of the global crisis of 2008-2009, The Bahamas had a debt-to-GDP of 39 percent compared to its current position of 64 percent. It thus has a weaker position from which to respond.
The combination of potential downgrades and limited fiscal space will spell trouble for many countries, and borrowing thus becomes imperative. It does not require expert assessment to determine that, with the significant loss of tourist dollars, countries will need to borrow. In the case of The Bahamas, in its most recent quarterly publication, the Central Bank outlined this very clearly. Speaking to projected fiscal activities for 2020, it said: “In terms of the fiscal sector, expenditures related to the restoration of key infrastructure and social welfare spending, combined with revenue intake disruptions related to COVID-19, are anticipated to weigh profoundly on the government’s fiscal outturn. Reinsurance receipts and donations from domestic and international sources should mitigate some of the shortfall in revenue. However, the remaining budgetary gap will require a rise in domestic and external borrowings.” The circumstances for Barbados, Belize and Jamaica, with much higher debt-to-GDP, is more disconcerting. This will no doubt be very concerning for the leaders of those countries. If the need for significant borrowing holds true, as we think it will, policymakers must be ready to make hard decisions and bring some level of creativity to reinvigorating the economy should inflows from borrowings prove insufficient.
Will further rating agency reviews place greater pressures on the region to secure funding for economic recovery? Could we see an increased risk of sovereign defaults? Will the region be able to afford any funding premium that may arise because of the current unfavourable outlook? Factors such as unusually high demand for debt; weakened economy and negative outlook; potential shortages of bilateral loan arrangements and the limited resources of multilateral agencies all weight heavily. These are important questions to contemplate for policymakers and citizens alike. The answers to this will impact what our recovery may look like.
The risk factors for the region
As it relates to sovereign debt, COVID-19 may be delivering to the world a ticking time bomb. Is there a storm brewing as it relates to emerging economies securing loans? There are a number of factors to be considered as we analyse the potential challenges that emerging economies face at this time. These provide important signals. This economic and financial crisis is different from past events in that every single country is experiencing the ravages. The demand, as mentioned before, increases the potential cost of securing debt. The market for borrowing is reduced given the fact that facilities which Caribbean countries would normally look to secure, borrowing on a bilateral basis or through some pre-determined agreements, have likely evaporated, as the countries that usually facilitate these are themselves grappling with the immense cost of securing funds for stimulus. Soft loans that may be available prior to now are likely all gone. The demand is high in a contracting market.
Countries within the region will most likely resort to multilateral agencies such as the International Monetary Fund (IMF). Kristalina Georgieva, its managing director, said there is demand for $2.5tn - an estimate that is considered to be on the low side. Our research shows that the IMF’s available resources are likely to significantly lag this amount. Where, then, will some of the most vulnerable states turn, including those within the region? Policymakers should take seriously the statement she made on the same call, noting that more than 80 countries have already placed requests for IMF financing. One question is whether this will be granted on a “first come, first served” basis, or will there be an underwriting standard that takes into account the fundamentals of the country? Will sovereign ratings, the risk of some disorderly sovereigns, and unusual demand place certain countries at risk of having to navigate the post COVID-19 event with very limited resources?
Certainly, the impact will vary. However, taken as a whole, the Caribbean is highly dependent on tourism for its foreign exchange inflows. There are commentators who have espoused the idea that countries should start looking within for resources to fund the recovery. While this may be a supplemental approach, it is not likely to be optimal. Such an approach will fail to address the need for new capital injection, especially for net importing countries, and those with pegged exchange rates such as The Bahamas, where net reserves will come under significant pressure. It is worthwhile to repeat that there is no definitive projection as to when this event ends. It is also worth underlining that the end of the virus is not the natural end of the financial and economic pressure. There will be a likely lag as behaviours renormalise, reversing social distancing as a necessary precursor for the return to vibrancy of tourism, the lifeblood for the Caribbean.
According to Oxford Tourism (Oxford Economics), 15.2 percent of the Caribbean’s GDP and 13.8 percent of employment is generated from tourism. On an individual country basis, this contribution ranges significantly from a low of 7.7 percent of GDP, in the case of Trinidad and Tobago, to a high of 98.5 percent of GDP for the British Virgin Islands. In 11 of the 21 countries analysed, tourism accounts for over 25 percent of GDP, which is more than double the world average of 10.4 percent. In the case of The Bahamas, the contribution amounts to 48 percent, and in Jamaica, approximately 20 percent of GDP. This dependency highlights the vulnerability of the region, which gets worse for many individual countries.
Given that a large portion of our spend is with developed countries, and having regard for the potential difficulties, based on the risk highlighted above can an argument be made that G-7/G-10 countries start looking at how they can support the region and other emerging economies? After all, these are their markets. These markets will have pent-up demand but with significantly retarded ability to purchase. This, therefore, may be a practical way of addressing the demand-side shock of this event. Following the global supply chains, it will be easily appreciated that weakened importing countries will result in weak sales for exporters. As policymakers interact with their global counterparts, initiating strategic conversations such as these could bring value to a country.
While all the above are fundamental, maybe the most significant risk facing the region is the main source of its tourism market, the US. To-date, the challenges seen in battling the virus in the US suggest that the tourism market is in serious peril and will be so for a long time. Therefore, despite efforts to restart economies, we are grappling with a demand-side shock that has to be solved first before any semblance of vibrancy returns to the market. Until this state of affairs changes, there will be little progress. Understanding that tourism contributes heavily to the majority of foreign exchange inflows for the region, we must guided by the evolving developments in that country. With jobless claims standing at 22m and unemployment increasing daily, and with the stock market and nest egg investment portfolio taking huge losses, reductions in disposable income will also occur. We must therefore anticipate a curtailment of discretionary spending, and hence a hit to the travel and tourism market. As we argued in our previous articles, the industry itself is likely to display a long-tail recovery and this spells trouble for earnings and government revenue.
To be continued.....
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