By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Chamber’s chairman warned yesterday that the Central Bank’s 50 basis point interest rate cut, designed to tackle anemic economic growth, “must not be seen as a knee jerk reaction” to the Bahamas’ new ‘junk’ status.

Gowon Bowe told Tribune Business that the regulator should publish details of all the deliberations leading up to yesterday’s announcement, so Bahamians could be reassured there was “rhyme and reason” to its action.

The Central Bank said the 0.5 percentage point cut to its Discount Rate, which is the rate at which it lends to the private commercial banks, was designed to spark more private sector/business investment ahead of Baha Mar’s opening.

Seeking to stimulate key industries that have long been depressed, and contributed heavily to negative per capita GDP growth over the past decade, the Central Bank said the Discount Rate’s lowering to 4 per cent was also intended to jumpstart the domestic housing market.

“This policy action is intended to position the domestic business sector to take more advantage of growth opportunities in the near to medium term, and to provide more support to housing sector investments,” the Central Bank said in a statement yesterday.

It effectively ordered the Bahamian commercial banks to “follow suit” by reducing the Prime rate, the rate at which they lend to each other, by the same magnitude - from 4.75 per cent to 4.25 per cent.

And, in turn, the Central Bank added that its licensees should also pass the reduced capital costs on to both new loans and existing borrowers whose facilities carry variable rates.

The interest rate cut, the first since June 2011 and for four-and-a-half years, occurred just 48 hours after Standard & Poor’s (S&P) cut the Bahamas’ sovereign creditworthiness to ‘junk’ status, costing this nation its ‘investment grade’ rating.

While the interest rate cut will be a welcome Christmas present for many Bahamians, given that there are just two shopping days left before the holidays, many are questioning both the Central Bank’s timing and rationale (see other article on Page 1B).

While himself suggesting that yesterday’s interest rate cut had “been in the works for some time”, Mr Bowe said it was vital that the Central Bank publish all its analyses and deliberations to show that it was not merely a response to the S&P downgrade.

“Hopefully, while there is relief in the actual reduction of the rate, there is rhyme and reason to the cut,” the Chamber chairman told Tribune Business.

He emphasised that it had to be for “the benefit of the whole economy”, increasing GDP growth, employment, business activity and spending, and not just to reduce the Government’s debt servicing costs.

“Hopefully we will see all the considerations and deliberations on why this was taken, so that it is not seen as a knee jerk reaction to other events taking place,” Mr Bowe said of the rate cut.

“It was very quickly released, so it had to have been in the works for some time at the Central Bank. This is a counter balance to news of the increase in external debt costs.”

Mr Bowe acknowledged that among the biggest beneficiaries from the Central Bank’s move will be the Government, which will see debt servicing (interest) costs associated with its near-$5 billion domestic debt pile reduced.

Virtually all the interest coupons on its Bahamas Government Registered Stock (BGRS) and Treasury Bill issues are linked to the Prime rate and, while the Central Bank’s action will not impact current issues, it will benefit future ones. Since the Government’s debt issues are being rolled-over and replaced frequently, the impact will not take long to be felt.

“Given that the Government of the Bahamas funds its debt through the local market, so this has immediate, positive effects for their debt servicing,” Mr Bowe told Tribune Business.

Many observers, speaking privately to Tribune Business yesterday, suggested that the benefits to the Government from reduced interest (debt servicing costs) were the main motivation for the Central Bank’s action.

Based on the latter’s data, the Government currently has around $4.281 billion in outstanding BGRS issues, and $856 million in Treasury Bills, accounting for almost $5 billion of the $6.78 billion national debt at end-September 2016.

A reduction in the Government’s domestic debt servicing costs will also help to counter, or offset, the higher borrowing costs it will now face on the international capital markets following the S&P downgrade.

The Bahamas will be perceived as a more risky investment, and investors will require a higher interest rate in compensation. And the pool of available investors has also shrunk, given that some institutions can only invest in ‘investment grade’ rated securities.

The Central Bank was silent on this benefit yesterday, suggesting that the analysis behind the interest rate cut was driven by “the prospects for a pick-up in growth in the coming year, resulting mainly from the expansion in the tourism plant”.

That means Baha Mar and other new properties, such as the Warwick on Paradise Island, with the Central Bank saying the increased tourism earnings inflows will further boost external reserve levels that are already benefiting from a lower oil import bill.

Essentially, the Central Bank’s rationale is that the interest rate cut will help to improve private sector and consumer confidence, and stimulate investment in job-creating expansion projects by Bahamian-owned businesses, cutting capital costs as they prepare to take advantage of foreign direct investment (FDI) opportunities.

“We know that for a long period of time there’s been a clamour that the interest rate environment in the Bahamas has overly high, while other economies have lowered interest rates,” Mr Bowe said.

“There’s certainly been a chorus line for people needing capital funding for interest rates to be lower.... This should spur some additional spending of capital expenditure, and give the average consumer relief in debt servicing costs given the highly leveraged citizenry.”

Yet some observers questioned whether the Central Bank’s rate slash will have any impact, given the commercial banking sector’s reluctance to lend, as measured by its $1.2 billion in surplus liquid assets.

Mr Bowe acknowledged that reduced borrowing costs did not translate into improved access to capital, explaining: “It speaks to your creditworthiness and viability as a business.

“Access to funding will not necessarily change, but the cost of those funds is going to drastically change.”

John Rolle, the Central Bank’s governor, yesterday said the debt service ratio and equity down payment requirements set by the regulator would prevent “an unsustainable credit expansion” among Bahamian consumers.

“We do not foresee unsustainable credit expansion as a result of this,” he told Tribune Business.

“Debt service ratios and borrower equity requirements also significantly dictate creditworthiness. Earnings prospects will govern those. We see those earnings prospects beginning to change for the same reason as the fundamentals that will boost tourism output potential.”

The Central Bank yesterday touted the 40-45 per cent ‘maximum debt servicing ratio’, and 15 per cent minimum down payment requirement, as safeguards that would ensure “sustainable credit trends” following the interest rate cut,

“Lending policies should also continue to be conservative, as commercial banks manage the expected gradual reduction in the overhang of non-performing loans,” it added.

However, the Central Bank’s action does creates ‘winners and losers’. It effectively represents a ‘wealth transfer’ from savers to borrowers, with the former seeing a reduction on bank deposit yields and other investment returns, while the latter benefit from reduced debt servicing costs.

Major institutional investors, such as commercial banks, insurance companies, pension funds and the National Insurance Board (NIB), which are the biggest purchasers of government bonds due to their ‘low risk’ rating and liquidity, will see an immediate reduction in their returns.

With commercial banking system deposit rates already at around 1 per cent, these will now slip even lower, forcing depositors to seek higher-yielding returns and investments elsewhere.

This, in turn will make Bahamian capital market investment securities, such as preference shares, bonds and equities, more attractive. Among the companies likely to benefit are Aliv, the new mobile operator, and its majority shareholder, HoldingCo, both of whom have capital raisings planned for the New Year.

“Good news for borrowers; bad news for savers,” was how K P Turnquest, the FNM’s finance spokesman and deputy leader, described the Central Bank rate move.

“This will hopefully make capital more affordable to finance some projects, spur some entrepreneurial activity and give impetus to some businesses to spend.

“It will hopefully offset what has been an increase in external interest rates. It is a counter-measure, and will help to balance the increase with future external borrowings.”

He added that the Central Bank’s action had effectively created an “inverse relationship” between the Government’s domestic bonds and interest rates, as a downgrade would normally prompt an increase in the latter.

“The real question is whether it is far too late for this kind of move,” Mr Turnquest told Tribune Business.

“This is an idea that has been floated for a little while; look at the Prime rate, and make capital more affordable and the economy more competitive. Hopefully, we haven’t acted after the horse has bolted by.”