In the first of a two-part series, Hubert Edwards examines the implications of the rating agency's assessment for the country's economic and fiscal outlook.
The Bahamas is standing at the crossroads. In one direction lies growth and development, but the other path is one burdened by debt and the heavy weight imposed by the critical decisions needed to take the country forward. Options are limited, the decisions are time sensitive, and the outcomes, regardless of what they are, will be fundamental to Bahamian well-being and standards of living. The question this begs is: What are the viable paths? In what direction should the country move? What are the trade-offs that must be made? What are the policy positions that must be brought to bear, and what uncomfortable but necessary conversations must be had? I believe the policymakers, having laid out their debt strategy and projected fiscal performance trajectory, must pay careful attention to any lack of congruence between the two and further articulate how existing tensions between the $10bn-plus national debt and economic growth are being reconciled and managed.
In its recent credit report, Moody’s gave its assessment on the recent fiscal projections. The credit rating agency said: “The Government’s assumptions about revenue growth may prove overly optimistic, risking a more gradual path to fiscal consolidation. Unexpected shocks, along with implementation slippage, are two key risks to the projections. Efforts to improve efficiency could fall short and force the Government to pursue contentious tax-raising measures.” This is not the first such warning. In recent times, Moody’s appears to be dampening the administration’s pronouncements and projections. What is their motive? Why is Moody’s seemingly against The Bahamas taking a more optimistic view of its own affairs? Well, as a sovereign rating agency, it has an obligation to its clients and the market, especially those who rely on it for intelligence, to present what it believes is an accurate state of affairs.
This does not mean Moody’s is correct and the Government wrong. It simply means there is a difference of opinion. That difference, though, holds important implications for The Bahamas. As the Government tells its story about the path to recovery, Moody’s and similar agencies are also telling a story about a subset of that equation - the national debt. What is important is the fact that both stories demand circular arguments and reasoning. Economic recovery is highly dependent on the effectiveness with which the current national debt is managed, and the reduction in interest payments and debt stock to sustainable levels. On the other hand, the extent to which the current debt can be effectively managed is highly dependent on economic recovery, a reduction in deficit spending and achievement of fiscal surpluses. Beyond the return to pre-pandemic norms, neither the future state of debt or economic conditions will independently change for the better. In this regard, the national debt and economic recovery is inextricably tied to each other, along with the fate of the Bahamian populace. The International Monetary Fund (IMF) eloquently puts it this way: “Even with significant fiscal consolidation, financing needs will decline only gradually over the medium-term. This creates elevated risks of the country finding itself in debt distress. Mitigating these risks will require careful planning.”
In my recent piece on the IMF’s 2022 Article IV concluding statement, I stated: “Regardless of the nature or tone of the commentary, it is critical that where the suggestions make sense there should be wise movement in those directions. Given where the country is economically, it is important that we draw on all available sources in a serious and practical manner. This must be done with a view to solving the problems which currently ail us, and position us for a more vibrant and resilient future; a future where we are able to better cope with the shocks, internal and external, that will continue to assail us.” This was a call to use all information available to us to better appreciate the current state of affairs but, more importantly, to find solutions going forward. The IMF stated in its recent Article IV concluding statement: “The Bahamas would benefit from a more robust multi-year debt management strategy.” That is a message worth reflecting on. Moody’s has laid out some important insights in its report. If we pay careful attention to the constituent parts of these report, not just to the headlined items, there is much insight to be gained.
Before analysing Moody’s 2022 report, let us consider some of its previous positions and how they inform current realities. In its 2021 ratings, Moody’s said it “expects the gradual recovery in tourism to leave a long-lasting impact on The Bahamas’ credit profile through materially higher debt and interest burdens, which will significantly exceed those of Ba3-rated peers.” The latter part of the statement is important. While there are many factors working in favour of the country, its debt circumstances make it an outlier compared to lesser developed states. The current experience of higher debt yields should not be unexpected. The rating category of Ba3 is considered to have speculative elements, and is subject to substantial credit risk. The Bahamas is rated Ba3 with a negative outlook. Appreciating that the country is an outlier within a speculative class, having debt levels beyond most very risky peers, underlines the pressure we face in financing current and future debt and the urgent need for a turn around.
Again, in 2021, Moody’s said: “The Bahamas’ debt burden was already higher than Ba-rated peers prior to the pandemic, and will remain above similarly rated peers as the economy recovers only slowly from the pandemic.” Reminding ourselves of the fact that these statements are primarily “conversations” directed at current and future bond holders, we should be able to bring clear context to the performance of our sovereign bonds on the international market before and after September 2021. The rating agency clearly noted that compared to other speculative options, The Bahamas is likely to be at a greater disadvantage. It would be no surprise, therefore, that such investors would treat bonds of countries many would consider “lesser” than The Bahamas as being of greater quality. It is possible to glean this message from the 2021 statement suggesting that the pandemic “…has fundamentally weakened The Bahamas’ credit profile with lasting consequences in terms of a higher debt burden and weaker debt affordability, as well as reduced economic strength”.
Why is this important? How does this tie to the main point being discussed here? The answers lie primarily in the fact that there has been no great change in circumstances. This is evidenced in Moody’s latest 2022 report, which said: “The Bahamas’ debt burden likely peaked at 89.4 percent of GDP as of the end of fiscal 2021, while the interest-to-revenue ratio will peak in fiscal 2022 at 24 percent. These ratios are among the highest for Ba-rated sovereigns.” The country is expected to remain firmly rooted in the upper tier of an adverse classification. The Bahamas is well beyond sustainable levels of debt, and the market perception of its recovery is not good. The extent of the adverse debt impact on economic recovery, ease of securing future financing and market response becomes clear when we appreciate that almost one-quarter of government’s revenue will go to pay interest costs (debt servicing). Policymakers’ most urgent concern is likely to be how to change market sentiment and reduce the proportion of revenue going to debt servicing, thus facilitating greater investment in productive infrastructure developments and priming the economy for growth.
This 2021 statement from Moody’s aptly describes the current situation that The Bahamas is experiencing. “The removal of COVID-related spending on unemployment benefits and other related items, along with a revenue recovery, will support fiscal consolidation, which will reduce the debt burden gradually.” it said. The pandemic has shifted positively. There is a return of tourism dollars, reportedly at a better-than-expected level, and spending on social support is all but gone. Under these circumstances, if sustained, there is a reasonable expectation of debt reduction. It is the pace of this reduction that poses a risk for The Bahamas. The IMF said: “The factors most likely to affect the Bahamas’ credit quality are the pace of fiscal consolidation, how quickly the Government returns to fiscal deficits consistent with reducing its debt, and how the Government meets its relatively large financing needs over the next two years without putting downward pressure on debt affordability and increasing liquidity risk. Financing needs and liquidity risk will remain high over the next two years.” The IMF is forecasting that the timeline for a notable downward shift in debt is still, at best, in the mid-term, which is generally consistent with the Government’s own strategy.
The next two years or so will therefore be crucial. Despite anticipated positive fiscal consolidation, the expectation for economic performance is low, interest loads are high and debt reduction will be slow. Given that these projected outcomes appear reasonably firm, it is expected that policymakers will use this window to nurture near-term adjustments such that the benefits will begin to materialise sooner or later. It is important, therefore, when the rating agency pointedly states: “The Government’s assumptions about revenue growth may prove overly optimistic, risking a more gradual path to fiscal consolidation. Unexpected shocks, along with implementation slippage, are two key risks to the projections. Efforts to improve efficiency could fall short and force the Government to pursue contentious tax-raising measures. The administration must remain mindful of the need to demonstrate the soundness if its projections, the soundness of its policy selections, and the potential impact of its chosen reforms. The communication of a sustainable, positive future is critical to unlocking possibilities for the economy given Moody’s statement that “The Bahamas’ credit profile incorporates the country’s moderate economic strength, reflecting its subdued economic performance, high wealth levels and moderate institutional strength”. Alongside the negatives, every positive element has been considered. The upside must rest in reversing the negatives and improving on the positives.
To be continued....
NB: Hubert Edwards is the principal of Next Level Solutions (NLS), a management consultancy firm. He can be reached at firstname.lastname@example.org. He specialises in governance, risk and compliance (GRC), accounting and finance. NLS provides services in the areas of enterprise risk management, internal audit and policy and procedures development, regulatory consulting, anti-money laundering, accounting and strategic planning. Hubert also chairs the Organisation for Responsible Governance’s (ORG) Economic Development Committee. This and other articles are available at www.nlsolutionsbahamas.com.