There is every expectation that The Bahamas’ current economic crisis will eventually come to an end. These things always do. What is not as clear is when, and how, it will be corrected. At what stage will the structural deficiencies be addressed, placing the country on a path for improved economic growth when compared to our pre-pandemic experience of about 1 percent annual average expansion. Why is this important? COVID-19 will leave The Bahamas with an elevated level of debt, as evidenced by the most recent budget predictions. The debt stock is for the first time undergoing a fundamental shift in its historical composition as it relates to the weighting of foreign versus domestic currency liabilities. Marla Dukharan, the regional economist, in her analysis of the 2021-2022 Budget, said: “There has also been a shift from domestic to external debt, which creates balance of payment pressures over time. External debt accounted for roughly 43 percent of total central government debt in December 2020. This compares to 21 percent at the end of fiscal year 2010-2011”. The Bahamas’ external debt presently stands at just over $4bn, with the internal debt of $5.5bn and contingent liabilities worth $421m.
This balance of payments issue is one that does not often get much attention from commentators. Economist Rupert Pinder, though, highlights this often. The concern is The Bahamas having sufficient foreign currency inflows and reserves to meet its debt repayment obligations. The higher the external debt, the more revenue that is needed to meet these payments. The reality is that, as dire as this may sound, it is the opportunities that must be focused on. The opportunity to change the narrative. The opportunity to focus on fixing the fundamentals long left undone. The opportunities to galvanise the three main sectors, public, private and social, around redefining what the future will be. The opportunity to wrest back the productive capacity of The Bahamas that has been, and will continue to be, eroded by debt until there is a marked reduction, significant increase in economic growth or - more ideally - a combination of the two. Until either of these happen, every fiscal decision made by the Government could come down to a matter of life or debt.
The COVID crisis as we know it will end, but its effects will linger and morph. We must therefore continue to pay close attention to what is happening. The crisis will continue to have an impact on global output, supply chains and, therefore, the availability and price of input materials. As a largely importing country, we are definitely going to import higher inflation. This has implication for businesses and individuals alike. As we contemplate The Bahamas’ ongoing recovery, there must be a readiness for flexibility. The pandemic’s fall-out will test our resources, put pressure on our purchasing power, and may ask questions about our external reserves.
Solutions
It will demand answers over how aggressive we will be in managing the debt and finding new revenue sources, and it will challenge our ability to work together to find solutions. The crisis, therefore, has the potential to influence new self-imposed crises should we not work diligently to solve these challenges. In all this, though, the greatest crisis we could face is one created by the simplest of means; being comforted by the initial round of early pent-up tourism demand, and assuming that things will come back to normal, as we knew them to be, and acting accordingly. How much government revenue is earned, say via VAT, during the hours that are covered by the curfew? How many persons have now settled into a practice that will see them at home before 10pm? What level of change has happened where persons now enjoy home cooking as opposed to eating out? What behavioural changes have occurred which will adversely affect some business, while positively affecting others, but resulting in a potential net effect of lost revenue? Yes, the crisis of today will end, but it will bring changes. Some are readily predictable, others are unknown, and there is therefore increased uncertainty in anything that may be benchmarked against the pre-COVID-19 period. This is why bold and game changing decision-making, sound reasoning and a new type of narrative must become the defining features of the road to recovery.
Bahamas is roaring back
I recently saw a Facebook post where the writer lamented the point that there are persons who are disappointed with the improvement in the economy. It is difficult to imagine why anyone would be so inclined. Such individuals clearly either have no interest in the success of The Bahamas, or have such vested, narrow interests that they would rather see the economy flutter. If this were so, it would be reasonable to conclude that such persons have no idea of the economic challenges faced by the country, and nor do they fully appreciate the gravity of a prolonged period of depressed income. In a recent panel discussion, a leading financial figure said The Bahamas is facing an impending “Category 5” financial disaster. This is a very blunt and worrisome prediction. While I would not state it in the same terms, it is agreeable that the country will face some very challenging times ahead. The expectation of significant activity in the tourism sector is therefore a positive, urgently needed to help the economic buoyancy of The Bahamas. After all, this sector is the main engine of the economy, directly and indirectly responsible for upward of 75 percent of economic output. Tourism roaring back is an unequivocal positive.
There is, though, still a healthy level of uncertainty brought on by the continuing COVID-19 pandemic. There is an understandable desire for normality to return. On one hand, the increased availability of vaccines globally, especially in the US, has positively added to this outlook.
On the other hand, the challenges and difficulties of many countries, including The Bahamas, in accessing vaccines and grappling with vaccine resisters demonstrates how precarious the realities are. The performance of the US economy is also very positive and bodes well for improvements in the country’s economy. I believe, though, that the robust US first quarter growth of 6.4 percent should be tempered when setting expectations. There is little doubt that the fiscal policy response of pumping trillions into that economy, with payments going directly to households, is driving some of the growth and represents regaining some of what was lost since the start of the pandemic.
Tourism
The tourism game is still one where disposable income drives the vacation decision, and in my opinion it is way too early to determine how well the market’s disposable income has changed or will change. One of the benefits of the pandemic is that while there was significant disruption and curtailment of revenue for many companies, there was a marked reduction in expenses to compensate. A normalisation of economic and social activities will cause a reversal on the expense side that is likely to place many companies’ business models under pressure. Truth is, this pandemic will have a long tail recovery. We must therefore be mindful to not exaggerate expectations, and be watchful of potential future shifts beyond the immediate bounce from pent-up demand. It is my hope that the demand is sustained, given that the fortunes of tourism determines the fortunes of The Bahamas, and that the seeds planted from the previous budget are still in a state of germinating.
Let us consider a recent media report, which highlighted the level of economic activity being experienced in one of the Family Islands, Exuma. Based on the report there are significant challenges finding rooms, as everything is seemingly maxed out. This is fantastic news for that island and for The Bahamas. But here is what is most important in the context of our discussion: What is happening now is not unique. Yes, the concentration of demand at this point, given the pent-up nature, is high. However, Exuma has demonstrated a strong performance in its economy in recent years, especially as it relates to tourism. This island, though, clearly has a capacity issue. There is a need for improvement in health care and upgrade of infrastructure in various areas, which makes a compelling argument for significant improvements in local government machinery. One consistent call by the current MP is for more of Exuma’s tax dollars to be returned to the island. The challenge is that with the economic constraints faced by the country, and the significant level of debt, there is little to no chance of this happening, regardless of who is at the helm.
Momentum
A segment of The Bahamas that is ripe with opportunities to fuel additional growth is likely to be stymied by funding constraints. What does this mean for us? Without additional capacity, we are likely to return to only as good as we were. Extrapolate that to the entire Bahamas and one will readily understand why this issue is not simply about returning to pre-COVID-19 performance. What is most important is the ability to expand productive capacity to leverage this momentum, positioning
The Bahamas towards growth upwards of 2 percent annually. What is the most influential adverse influence on this? Debt.
The continued servicing of the high debt stock will progressively remove large amounts of the country’s spending power, or at least discretionary spend.
The pandemic has created a serious reduction in the top-line revenue for many businesses. This is no different for many state-owned enterprises (SOE) in The Bahamas. These entities have also seen a reduction in their expenses, but this will change as the economy re-opens. Many SOEs have been - and will continue to be - cash-strapped. Many have their own debt stock. Of all the SOEs, Bahamas Power and Light is the one of greatest concerns. Its proposed rate reduction bond is likely to be significantly imperiled by its financial performance, which has been worsened by then pandemic’s impact and general change in the finance market, thus rendering it a more risky proposition.
With knock-on pressure from higher unemployment, and therefore likely increased receivables, they will have little choice but to look to the central government for financial support.
There is a potential $500m-plus at play with respect to BPL. Bahamasair, another SOE, is at a lesser level likely to be in the same position. All this points to potential increases in debt.
This is why it is critical to not simply look at the individual initiative of the most recent budget.
Analysis at that level is important but not sufficient. In my opinion, every turn, every assessment has to be filtered through the lens of growth, taking into account the impact of debt.
To be continued......
Comments
Use the comment form below to begin a discussion about this content.
Sign in to comment
Or login with:
OpenID