Following downgrades by credit rating agencies Moody’s and Standard and Poor’s, a former minister of finance and Central Bank governor said credit rating agencies are being unduly harsh.
On Friday, Standard and Poor’s downgraded the country’s sovereign credit rating to ‘B+’ from ‘BB-’ with a stable outlook. In September, Moody’s downgraded The Bahamas to Ba3 negative from Ba2 with a negative outlook. Both agencies cited increasing debt levels in recent years without favorable fiscal management strategies.
James Smith, who served as finance minister under the last Christie administration and was recently appointed chairman of the newly-formed Private Sector Debt Advisory Committee, said the analysts in his view are not looking seriously at the country’s ability to pay its debt and are ignoring the fact that The Bahamas has never not paid its debtors.
“They are being in my view unduly harsh with their ratings and their analysis of this country, in terms of us having to pay extra points on interest because of their downgrades. I say it principally because they seem not to take into account the fact that The Bahamas has never missed a payment, much less reneged on a debt from the beginning, yet we find ourselves in the same category of countries that have been in and out of IMF programs and are still there,” he said.
“So I think sometimes they are judging us unduly harshly. I also think that this one on Friday, the further downgrade, absolutely ignores the fact that we are coming out of a COVID environment and the likelihood of increased visitor arrivals to The Bahamas will really begin to show. If nothing else changes at the very least things will not only stabilize, they are looking up. The analysts in my view are not looking seriously at the country’s ability to pay its debt.”
Although in its recent country assessment, Stand and Poor’s highlighted that the Davis administration has announced two new committees to review revenue policies and public debt strategy, it said any recommendations and new policies arising from these committees will take several years before they have a meaningful impact on public finances.
Asked about his new position as head of the debt advisory committee, Smith said substantive work has not yet begun, nonetheless, the general focus of the committee would be to explore multiple ways to manage the foreign currency debt, which has grown by more than $2 billion in the past few years.
“Broadly speaking the debt has to be looked at in terms of the currencies. The most important, at least in terms of managing, would be the foreign currency portion of the debt, which I think represents maybe one third of our borrowing, but so much has been borrowed in the last year or two that I don’t have the figure in my head. But the thing with the foreign currency debt is that we have little maneuvering room in terms of renegotiating, because they would sell Bahamian dollar bonds normally in US dollars and in turn these things are sold in the secondary market, so restructuring them is more costly if it is done at all,” Smith said in an interview with Guardian Business yesterday.
“And also, I think the repayment of that debt is highly dependent on the amount of foreign currency inflows from tourist expenditure and inward investment, which has been painfully slow during the COVID-19 period. So I think that category of Bahamian debt has to be looked at very carefully and managed in such a way that we are able to meet the foreign commitments.
“It also emphasizes the fact that if you concentrate on that, we ought to be given credit by the rating agencies as well. With the local debt, most of that is being held by either the National Insurance Board, which is a government institution, or the local banking institutions, which if you need to renegotiate terms or request lower payments over a longer period of time, that can be done more easily. I think that would be the basic framework, looking at the foreign currency versus the local B-dollar debt. Or there’s also consolidating all of the debt and then reissuing with a type of instrument that would be more manageable, with a series of different maturities.”
S&P noted under a worse case scenario – the government’s inability to close budget deficits over the next 12 months or if economic recovery lags – there could be a further downgrade. On the upside, it stated it could raise its rating by next year if the government “establishes a track record of enacting meaningful financial reform, demonstrating an ability to raise revenues and leading to sustained near-balanced financial results and improved economic prospects.”