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'Worst Ever Mistake' For Inflated Reserves

photo

James Smith

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The $2bn foreign exchange reserves are less healthy than they appear because of the Minnis administration’s “worst ever mistake”, a former Central Bank governor argued yesterday.

James Smith, also a former finance minister, told Tribune Business that the nation’s foreign currency reserves had been artificially boosted by the $750m US dollar bond that the government placed in the international markets in November 2017.

Pointing out that this represented “borrowed” money rather than inflows “earned” from tourism and foreign exchange activity, Mr Smith said the current pressure imposed by the COVID-19 crisis showed why he had misgivings at the time about the bond issue.

Reiterating that it had created a currency “mismatch” by repaying Bahamian dollar debt using foreign currency, he explained that the borrowing had created a further “claim” on The Bahamas foreign reserves through the extra US dollar interest and principal it will have to repay to investors.

Backing the Central Bank’s decision to suspend approvals for dividend repatriations by the Canadian-owned banks to their international parents as a way to preserve the foreign currency reserves, Mr Smith said the move was a further sign of the deep “stress” imposed on the Bahamian economy by the pandemic.

“If you drill beneath you’ll find it’s not $2bn,” he argued of the reserves, “because in the first instance it’s generated by a balance of payments support loan. I think that’s the biggest mistake they ever made.

“You don’t mismatch your currencies. You don’t borrow in foreign currency to pay back your domestic debt. The result of that, immediately when you make that borrowing, is that money is sold to the Central Bank and put in the reserves. Now the Central Bank has hundreds of millions more in its reserves than it didn’t earn.

“Normally reserves are added to by trade, the net spending of tourists. When $700m of that is a balance of payments support loan, it says we’re doing well but we didn’t earn that from net inflows, tourist spending. Now, with COVID-19, you’re not getting the inflows but still have to feed the nation and pay back the foreign currency debt associated with that $750m.”

Marlon Johnson, the Ministry of Finance’s acting financial secretary, defended the $750m US dollar bond placement at the time and pointed out that it had only been undertaken after consultation with the Central Bank.

He added that the Minnis administration had decided to tap the international capital markets because there were limits locally on how much government paper can be held by the Bahamian commercial banks, and the size of the market generally. Some $300m of the foreign currency borrowing was used to repay Bahamian dollar-denominated bank loans and Treasury Bills.

Multiple private sector contacts have expressed alarm at the Central Bank’s decision to halt the payment of dividends by the Canadian banks, thereby interrupting what has long been seen as a cornerstone of the Bahamian investment regime - no obstacles to profit repatriation by a foreign investor.

Apart from the impact to investor confidence, the Central Bank’s move was also interpreted as a sign of just how much trouble COVID-19 has left The Bahamas in. William Wong, a former Bahamas Real Estate Association president, told this newspaper of the regulator’s action: “I don’t know how many people appreciate that, but it’s a serious statement. That’s very serious.

“When I was working in the banks, every three months we used to send millions of dollars outside the country. Now it’s stopped. That’s a big, big statement right there. Wow.”

Robert Myers, a businessman with interests in sectors ranging from construction to landscaping and hardware, yesterday told Tribune Business the Central Bank’s action was an indication of how concerned it is about pressures on the reserves that ultimately support the one:one exchange rate peg with the US dollar.

With no tourism inflows to replenish the reserves, he argued that the Government needed to “stimulate” construction-related foreign direct investment (FDI) with time-limited real property and transaction VAT cuts to entice overseas developers and homeowners.

“They wouldn’t do that if they were not worried about the reserves and the peg,” Mr Myers added. “That’s a pretty draconian measure, a pretty harsh policy to say you cannot send a dividend to a foreign parent. That’s telling you something, right?”

The Bahamas, as a nation that imports virtually all it needs for consumption, faces a massive foreign reserves drain without any inflows to replenish them amid the ongoing tourism industry shutdown. While the reserves were said by the Central Bank to remain at $1.995bn in March, just as the COVID-19 pandemic took hold, they are projected to fall by $1bn over the course of 2020.

The Government’s foreign currency borrowings amount to just over one-third of its total debt, and Mr Smith said this component would be far more difficult to reschedule given that it is held by international money managers, institutions and other foreign investors.

Suggesting that the Central Bank had likely acted out of “an abundance of caution”, and would have discussed its intentions with the Canadian-owned banks beforehand, Mr Smith reiterated: “You have reserves that are not necessarily what they appear to be and look higher than they are because they’re being propped up by the Government.

“It’s a double whammy in a way, and you might have a perfect storm in terms of the impact on the foreign reserves.... It is actually an indicator of the stress under which we find the economy. We import everything we consume, our ability to import depends on our foreign currency holdings, and foreign exchange depends on tourism inflows. We have no tourists coming in.

“We have competing demands for the international reserves. These are to pay off the country’s foreign debt, pay for food imports and other services needed by the public, and profits repatriated by the banks. It can’t happen at the same time, so we have to make some choices.”

Mr Smith said he was unable to recall any previous suspension of bank dividend approvals. The Central Bank has said it will keep the move under regular review through September 2020.

Comments

SP 3 months, 1 week ago

Watching the long lines at money transfer operators every day and reading this article, immediately brings several questions to mind.

Firstly, will Mr. James Smith or someone knowledgeable please expound on what amount of hard currency ex-pats repatriate monthly, the added pressure, if any, on the Bahamas foreign currency reserves being imposed by ex-pats repatriating foreign currency during this time, and any ideas on how much deepened “stress” is being imposed on the Bahamian economy by repatriations during the pandemic?

Secondly, as the Bahamas, has a 90+% consumption economy, now faces a massive foreign reserves drain without any inflows to replenish them amid the ongoing tourism industry shutdown, should we be working towards eliminating ex-pat repatriations as much as possible at least in the immediate to short terms?

Thirdly, If we have no tourists coming in spending hard currency in the economy, how will we continue to pay for and import everything we consume? As our ability to import depends on our foreign currency holdings and foreign exchange depends on non-existent tourism inflows, is it wise to allow ex-pats to continue repatriating quickly depleting, limited, foreign currency?

Lastly, exactly what indicators, barometers, or benchmarks has the government established to warn them when and if ex-pat repatriations become a threat to financial security?

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Well_mudda_take_sic 3 months, 1 week ago

You made it very clear you don't like "ex-pats". But legal ex-pats are not the problem. It's the many thousands of illegal aliens in our country sending whatever funds they can back home to their families who are the much bigger problem for our foreign currency reserves.

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tetelestai 3 months, 1 week ago

I came just to read mudda rage on James Smith. Somewhat disappointed, mudda!

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Porcupine 3 months, 1 week ago

We cannot continue to blame "others" for our lack of intelligent decision making and lack of planning. This is a surprise because of ignorance, not an act of god. There are things we can do, and will do now, that we are forced into it. Food independence is one, because the dollars will not be there to buy so much. Our banking system, which serves the very few, should be overhauled. But, that takes talented, intelligent, apolitical individuals. We won't be seeing this anytime soon. It is an overwhelming belief system by our society, our educational system,our families, our churches, that have indoctrinated all of us into thinking that this dog eat dog world is the best we can do, or is the way it should be. There is a Christian message in all of this. I doubt the majority can understand it. This is by design.

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Hoda 3 months, 1 week ago

I agree that the way we access capital and financing must be reenvisioned. Nonetheless, how does that happen when our major commercial lenders are of foreign origins, where their policies are crafted in Canada or TT or wherever. I’m tired of going in the bank one day and then next day it is head office say we can’t do this or that. Perhaps we should re employ our cultural practice of asue into group or community funding for small business and not scamming ppl

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banker 3 months, 1 week ago

Well said Porcupine. We are still in the tribal stages here. Look at Birdie and Tal. Their partisan tribalism trumps their common sense, patriotism, rationalism and logical abilities. Until all of us, especially those in power can dig into inner enlightenment and personal resources to put aside tribalism and do things for the common good, we will always be a "developing" nation. I don't think that is possible unless at least 3 of the oldest current generations are mouldering in their graves (underwater at that, with global warming).

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birdiestrachan 3 months, 1 week ago

What about BTC is that money going out of the Country and does it affect the foreign reserves.??

Mr. Smith is a brilliant man. They should have used his advise for free.

Because Turnquest and Johnson do not know. Now the chickens are coming home. hands empty.

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banker 3 months, 1 week ago

Most of the inflated reserves happened under Perry Christie's watch.

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