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Ferguson: Debt to cash flow is real indicator of financial position

Anthony Ferguson.

Despite the economy’s positive growth, Colina Financial Advisors Ltd. (CFAL) President Anthony Ferguson said to properly gauge the country’s financial strength government should focus more on its debt to cash flow position rather than debt to gross domestic product (GDP).

The Bahamas maintains a GDP level of just over $12 billion, according to the most recent figures by the Department of Statistics, with $7.2 billion of that amount accounting for debt – a ratio of around 58 percent.

But Ferguson argued The Bahamas is discounting major obligations, like the public pension program.

“The big thing we don’t talk about and all countries around the world do it – but I think in this regard rating agencies, et cetera are changing their tone and feelings toward it – and that is we need to start taking into consideration our underfunded obligations and debts like pension funds, which is over $2 billion, that we need to include in our debt,” he said recently while a guest on Guardian Radio talk show “Z Live”.

“Whether you like it or not, that’s a part of the debt. That’s like me going to the bank and signing that I guarantee my daughter’s purchase, I don’t have to pay it, but that’s a debt that I would have to step up to the plate and pay if she doesn’t pay.”

Under that premise, Ferguson said government can conceivably be in a position where its social obligation can be 15 to 25 percent of GDP.

“What’s going to happen is, I think, going forward…a lot of time we say our debt-to-GDP is x, and I think we do that for consistency for comparative analysis from country to country, but in our case and in most cases, what you need to look at is what is our debt to cash flow,” he said.

“Because you can have $20 billion GDP, and if you’re not collecting any taxes you can’t pay your debt, even if it’s low. And that is why I think we need to focus on cash flow.”

Prime Minister Dr. Hubert Minnis announced in June that as a part of government’s efforts to right-size the National Insurance Board’s (NIB) pension fund, new hires to the public service would be required to contribute to a mandatory pension plan.

Government has been urged by several economic watchdogs, including the Inter-American Development Bank (IDB), to increase Bahamians’ NIB contributions in order to stave off the collapse of the fund due to the huge financial obligations from pension liabilities.

In his overall assessment of the economy, Ferguson said the modest growth the country continues to experience cannot offset the need to continue borrowing.

“We are seeing positive growth. For the last five years, if you annualize it, we’re still under half of one percent per annum, which is not sufficient to allow us to not have to continue as much borrowing as we do today, and so we need to find some investments that would cause the economy to grow in the order of two-and-a-half to three-and-a-half percent,” he said.

“That would begin to allow government to have sufficient revenue to borrow less and then to direct some of those investments in infrastructure for additional investment.”

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