CB governor assures govt can service high debt levels

Despite debt levels at their highest in Bahamian history and a debt-to-GDP (gross domestic product) ratio hovering around 74 percent, Governor of The Central Bank of The Bahamas John Rolle said yesterday he still doesn’t believe The Bahamas is in the “danger zone”.

The national debt now stands at $8.9 billion after the government borrowed close to $1 billion during the first quarter of this fiscal year.

Rolle said the likelihood that the government would approach a level that would result in default in the near future is not high.

“I don’t not believe that we are in that zone, I can assure you that the government of The Bahamas has great means at its disposal on which to act to get more revenues if it needs to, if that’s what it takes to address the debt situation. The Bahamas still has a relatively low tax burden. Now someone might try to dispute that later, but if you look at the debt burden of The Bahamas and you look at some other countries and you look at the average tax rate in The Bahamas, we have the capacity and the space,” Rolle said during the Chartered Financial Analyst Society of The Bahamas webinar on “Evaluating The Bahamas’ Economic Health: Prescription for Recovery and Growth”.

“What is important I think in a lot of what we’re dealing with, is decisions on when we move to make changes. So that is what’s more important. And sometimes being too comfortable is not always the best position to be in, because you might decide to wait longer than you should before you act.”

The country’s fiscal position has caused some trepidation on capital markets, particularly in the wake of the top two major credit rating agencies – Standard and Poor’s and Moody’s – downgrading this jurisdiction to junk bond status.

Rolle said the country must pay close attention to the outlooks given by the agencies in their rating assessments, noting that these outlooks matter considerably.

“One of the things that we have to do to get the assessments favorable and moving upwards is that we’re going to have to demonstrate that we can deliver on the debt reduction in the timeline that we were setting for ourselves. In addition to that, we’re going to have to establish a timeline for ourselves with the debt reduction that the market feels is comfortable. Because the market is always concerned that you’re going to get a blow from a hurricane or something else and you’re going to need to borrow,” he said.

“So, the market’s confidence is longer than whether there is a belief that you will gradually climb out of this hole, even if occasionally you get a blow and you drop back down. They want to see on a sustained basis you will get out of the hole and getting out of the hole means that you’re getting into a better peer ratings group.”

Devaluation

Speaking to concerns of devaluation, Rolle said to anticipate some reduction in foreign reserves at the beginning of 2021, but he quickly clarified that this is not unusual and should not be cause for alarm.

He said if The Bahamas doesn’t fix its problems, devaluation won’t solve its problems.

“In the case of The Bahamas, we have to always have 50 percent equivalent value in hard currency reserves to support the Central Bank liabilities. What people should understand is our liabilities also shrink during some periods of downturn in the economy and they expand during the upturn. When you break the length between the growth in your liabilities and your currency foreign reserves that is when you start to print money. Literally when you print money to lend to the government and that is where The Bahamas has moved more in the direction of, shackling its hands in the sense that there are now comprehensive limits on how much the Central Bank can lend to the government. And that is a tremendous discipline enhancer. So, from that point of view that gives some flexibility in managing,” he said.

“But similarly, when we look at how we protect out foreign reserves and our exchange rate medium and long term, there will also continue to be a role for the fiscal. To the extent that you are properly financing the fiscal needs and you’re managing the deficit financing needs of the government, you will also be managing the purchase that fiscal policy might exert on your foreign exchange markets if it is happening in ways that are not sustainable. But it is not a concern. Why I say it is not a concern, I mean to say that the tools exist to manage the risk. And to the extent that you can make use of those tools and actively address what’s happening in foreign exchange markets, that’s what’s critical.”

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