'Biggest threat' from $4.1bn national debt
By NEIL HARTNELL
Tribune Business Editor
The ever-expanding national debt, which hit $4.139 billion at end-September 2010 after growing by 12.5 per cent or $460.5 million over the previous 12 months, represents "the biggest threat" to the Bahamian economy's recovery and medium to-long-term prospects, a former finance minister warned yesterday.
James Smith, minister of state for finance in the former Christie government between 2002-2007, said that while the Bahamas' national finances were "nowhere near crisis" point yet, the "worrisome" aspect was the "aggressive" and "accelerated rate" at which the national debt and its ratio to gross domestic product (GDP) was increasing.
Arguing that the Bahamas urgently needed to regain its fiscal headroom to cope with further unexpected future shocks to its economy, Mr Smith said the main concern was the trajectory at which the national debt and debt-to-GDP ratio were rising, especially since the revenues to service them were still falling.
Commenting on the most recent national debt figures, published by the Central Bank in its 2010 third quarter economic review, Mr Smith said: "The increase is getting a little aggressive. Any time you have this continuing trend, and it's an upward trend, that's the concern, because it comes at a time when there is no increase in revenue, so the debt service element is growing at full steam.
"With less revenue coming in, and the cost of financing the debt going up, a greater part of Government expenditure has to be dedicated to debt servicing." As a result, the sums available for the Government to spend on essential services, such as health, education and national security, would be less.
Concern:
"There ought to be some concern about the rate of increase in the debt, because it's very difficult once you step over that slope to come back," the former finance minister added. "I don't think we're anywhere near crisis; it's the trend that's the worrisome part."
The Bahamas' national debt grew by 12.5 per cent or $460.5 million over the 12 months to September 30, 2010, and by 4.4 per cent or $173.3 million during that third quarter, aided by a $100 million domestic government bond issue.
While many small island economies had managed to withstand the global recession with higher debt-to-GDP ratios than the Bahamas, a number had been forced to head for the International Monetary Fund (IMF) to restructure their debt. And they, like the Bahamas, did not have a hard currency to back their debt, being forced to borrow in foreign currency.
The Central Bank report also highlighted another concern, namely that public sector foreign currency debt stood at $1.324 billion as at September 30, 2010, with 59.3 per cent directly attributed to the central government. And, according to Tribune Business calculations, foreign currency accounts for 32 per cent - almost one-third - of the total national debt.
"That's also worrisome," Mr Smith responded, when informed by Tribune Business about the level of foreign currency debt. "What is happening is that we're seeing a build-up in foreign currency reserves, which is good, but that has been produced by the Government's foreign currency borrowing and the IMF subvention [special drawing rights]."
The real issue for the Bahamas could come "somewhere down the road" when the Government's foreign currency bond issue matured, requiring a multi-million dollar principal repayment, likely to be in the region of $200-$300 million, to be made to the investors.
While the Government's existing foreign currency bonds all had medium and long-term maturities, if the foreign reserves were not boosted by inflows from tourism and foreign direct investment, the principal repayments would represent a substantial drawdown on these reserves - currently standing at $875 million.
Ultimately, this could result in "more and more foreign currency being used for debt reduction, as opposed to bolstering the economy" through import spending and such like, Mr Smith said, adding: "We have to be careful about the foreign currency portion of the debt.
"Right now it looks good on the monetary side because the reserves have increased, but that's not come from tourism or foreign direct investment - it's come from the proceeds of debt.
Rates:
"Again, down the road, in maybe another two or three years' time, when you look at this in a global context where interest rates have been held down by quantitative easing, the rate on our foreign currency borrowing could rise because it's tied to LIBOR.
"This debt servicing component of the Budget could rise even further still."
Describing the national debt and its growth rate as "the biggest threat" to the Bahamas' medium and long-term economic growth and stability, Mr Smith told Tribune Business: "We are rapidly using up the headroom in the event we do have problems down the road, and for us it's external events that put us out."
Pointing to the 'short, sharp shock' to the Bahamian economy caused by the travel hiatus following the September 11 terror attacks, which plunged this nation into a temporary recession, Mr Smith added that with the likes of Europe and US also carrying major debt burdens, the Bahamas would have to compete for "the same pool" of financing, something that could see it crowded out or forced to pay higher interest rates on its debt.
"We're not out of the woods yet. We need to continue to get the headroom in the event of a short-term crisis," Mr Smith said. He urged the Government to conduct a careful, proper analysis of the fiscal picture to ensure the Bahamas enjoyed a soft landing.
And the former finance minister warned that while the Government "may have it under control internally", the growing national debt and falling revenues would be interpreted as a bad sign by the international community. Indeed, the rising level of government debt saw interest payments during the first quarter of the 2010-2011 Budget year to $44 million, a growth of $12.2 million or 5.29 per cent.
The direct debt charge on the Government grew by 5.3 per cent or $181.4 million over the 2010 third quarter, and by 10.6 per cent or $342.6 million in the 12 months to September 30, 2010. Bahamian dollar obligations accounted for 78.1 per cent of this direct charge.
December 31, 2010
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