Economist: Bahamas could be facing potential balance of payments crisis

While Bahamian financial authorities continue to posit a tepid, but optimistic outlook for the country’s near-term fiscal position and tout a flexible strategy to keep the economy afloat, Caribbean economist Marla Dukharan contends this country’s borrowing to pay interest on existing debt points to structural problems in the country’s fiscal affairs. She points out that borrowing foreign currency to support external reserves is a slippery slope that will prove unsustainable.

Dukharan, in her December outlook for The Bahamas, said financing huge debt margins from similar borrowing led to defaults and restructuring scenarios for Barbados and Suriname.

“Borrowing increasingly in foreign currency implies that there are more and more foreign currency obligations to fulfill, just when the nation’s foreign currency earnings are probably at their weakest,” said Dukharan.

“This means on a net basis over time, based on foreign currency debt alone and the repayment thereof, there is a higher net outflow of USD, unless this foreign currency borrowing is being used to finance some investment that earns more foreign currency than it costs.

“It is important to note that it is not just at maturity that the risk of default presents itself. Indeed, the two most recent debt default/restructure scenarios that took place in the Caribbean – Barbados in 2018 and Suriname in 2020 – were not triggered by a sovereign bond maturity.

“A longstanding primary fiscal deficit and borrowing to pay interest on existing debt, is a good indication that the level of debt is already unsustainable, regardless of what your debt/GDP (gross domestic product) ratio looks like.” 

Dukharan said in her report that the economic shocks caused by Hurricane Dorian, the impact on tourism due to COVID-19, a nascent fiscal responsibility framework, “unsustainable” debt levels and unsustainable borrowing to support external reserves all point to a worrying economic outlook for The Bahamas.

“These factors suggest that The Bahamas is facing a potential balance of payments crisis, which is possible in the next year or two, not because the government has not managed these crises appropriately, but because it is hard to imagine how any small, open, developing economy would be able to successfully survive its worst natural disaster in history and a global sudden-stop, within one year,” Dukharan said.

“A balance of payments crisis would not necessarily reflect on the authorities as much as it reflects The Bahamas’ vulnerability and indeed, that of many in the Caribbean.”

The government has already contended that according to its calculations, The Bahamas is nowhere near debt levels that warrant concerns over a sovereign debt default.

The Ministry of Finance (MOF) stated earlier this month that it is confident the government’s decision to bolster external reserves through foreign currency borrowing, expenditure restraint, the reform of state-owned enterprises and a number of strong commercial investment projects bode well for the near-term health of the country’s economy.

Those fiscal measures, coupled with the optimistic outlook on the return of the tourism industry, are cited by the MOF as reasons Dukharan’s grim economic prediction will be warded off.

The post Economist: Bahamas could be facing potential balance of payments crisis appeared first on The Nassau Guardian.

source https://thenassauguardian.com/economist-bahamas-could-be-facing-potential-balance-of-payments-crisis/