By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government may be reaching its debt limits given that such liabilities are now bigger than the economy, the Debt Advisory Committee’s head warned yesterday.

James Smith, former minister of state for finance in the first Christie administration, told Tribune Business that The Bahamas current debt-to-GDP ratio of 100.4 percent is “not a comfortable place to be” as he prepares to advise the Government on how to manage and reduce its $10.356bn stockpile of liabilities.

“We might be reaching our ceiling when we have debt at the level of GDP. It’s not a comfortable place to be,” he conceded. “It’s the quantum of the debt and the tenor of the debt that we have to look at, and the way forward would be to manage the debt by setting some objectives, but we wouldn’t know that until we get the committee formed and get a fully comprehensive background on it.”

While the economy’s rebound will increase output and gross domestic product (GDP), thereby likely taking the debt ratio back below 100 percent, this will likely remain elevated in the high 80 percent to 90 percent-plus range for some time to come given the blow-out produced by Hurricane Dorian and COVID-19 that further accelerated The Bahamas’ fiscal deterioration.

Mr Smith, meanwhile, said the Debt Advisory Committee and the Government cannot focus solely on the latter’s debt burden and associated servicing costs given that there are multiple impacts on the wider economy to consider.

He added that the Committee would first need to come to grips with, and gain an understanding of, issues such as how much of the Government’s debt is denominated in foreign currency as opposed to Bahamian; whether there are any “balloon payments” attached to specific issues; the flexibility of creditors and lenders; the split between long and short-term debt; and the tenors and maturities for every debt tranche.

“The debt itself, and the servicing of the debt, is dependent on the economy, which is really then reliance on tourism where we get most of our foreign exchange earnings from,” Mr Smith told this newspaper. “Those earnings go not only to pay debt but pay for imports.

“We cannot only look at the debt but the economy, and particularly the demand for foreign currency settlements. If the Government is going to use a certain amount of foreign currency inflows to pay its debt, it also need to look at what the importing sector needs to keep the economy going. That’s not just goods and services, but intermediate products.”

Mr Smith said such considerations, namely not crowding out the private sector and critical foreign exchange, “go beyond what you might see in a developed country” with a convertible currency and floating exchange rate.

The Bahamas, though, has a non-convertible currency, but the former finance minister argued that the one:one fixed exchange rate peg with the US dollar had served the country well and needs to be maintained.

“It’s very helpful for the tourism sector,” Mr Smith said. “It gives certainty, and in any economy you need confidence in the value of your currency and exchange rate, that it’s the same next week or next month, otherwise people and tourists start hedging.

“We need to look at all the metrics; where we have come from, where we are now and where we want to go in the future. We may want to set a fiscal target for revenue to GDP. But we have to do it in such a way that we’re able to minimise any impact on the wider economy, the real economy.

“We can fix debt servicing in a very short period of time, but would disrupt other sectors of the economy.” The Prime Minister himself last week said he wants government revenues to be equivalent to 25 percent of Bahamian GDP by the time his administration’s term in office ends, while the Fiscal Responsibility Act mandates the Government adhere to deficit and debt-to-GDP targets.

Mr Smith, meanwhile, said the Committee and administration also have to ensure The Bahamas’ debt woes do not drag down this nation’s post-COVID recovery while being mindful of global impacts such as the supply chain disruption and rising energy costs.

“In terms of the [COVID] crisis we might have passed that,” he added. “What we’re looking for now are more positive signs in the economy, and signs of the return of more tourists, which bring you more revenue to apply not just to debt servicing but other costs of the economy. You have to keep an eye on the re-opening of the economy as well.”

John Rolle, the Central Bank’s governor, yesterday said the $75m, one-year Bahamas Government Registered Stock bond offering that closed last Wednesday was “substantially oversubscribed” although he provided no figures.

This will likely have come as some relief to the Government after what one institutional money manager, speaking on condition of anonymity, described as a “wake up call” when just $12m of the previous $30m bond - which was issued in August - was picked up by the market. The Central Bank picked up the $18m balance.

Mr Rolle, addressing the Central Bank’s third quarter economic briefing, said: “The size of the public sector’s net borrowing requirements, and the stimulus impact of such government expenditure, still require a prudent mix of deficit financing in Bahamian dollars and foreign currency.

“Although this optimum is shifting more towards domestic currency financing, it still maintains a requirement for significant foreign currency funding in the mix, and this informs the consultative process that is maintained between the Central Bank and the Ministry of Finance.

“Nevertheless, our near-term outlook does tolerate some reduction in the reserves for justifiably increased domestic financing of both public and private sector investments.... From a monetary policy perspective, the Central Bank is taking a more relaxed position concerning protection of the Bahamian dollar currency peg, and is accommodative to increased domestic financing of both the public and private sectors.”