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Saturday, October 18, 2014

What are we doing in The Caribbean? Productivity vs. Busyness.

Government workers are lousy, lazy and dreadfully incompetent. They come to work late, don't produce results of what you asked or paid them for in a timely manner, plus they take 3 hour lunch breaks and then leave work more than a half an hour before their scheduled knock off time.

Employees in the private sector want more money for doing nothing at all. I mean, where do they think this is? Don't they see that I'm the boss and I know it all? What work do you do around here?! How dare you ask for more than $200 dollars a week? For what you do? Are you kidding me? You want us to raise the minimum wage to what?!?

This is what you hear across the board when we talk about labour, work and employment for The Bahamas. You hear the same cries even in America and Canada. No doubt the calls are all the same across the Caribbean and Latin America too. But, for the Caribbean's sake, is it all true? Or, is it just misguided anger?

The most recent strike actions in early September from the Trade Union Congress (TUC) and their related sub-unions has garnered some attention from the local and international media. The courts granted an injunction to the government to put a halt to this action that the government felt was illegal, however the discontent was already in the air and certain concerns were placed before the Bahamian people with regard to these labour matters. Matters that will most likely be addressed, but at a later date.

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This strike action prompted this author to review an IMF Working Paper read a few months ago. Published on July 1, 2014, the paper analysed labour market issues in The Caribbean.

I must say from the rip that I'm not in favour of labour unions striking on a whim. I'm not appreciative of their particular matters being rejected totally out of hand either. I'm also not particularly agreeing wholeheartedly with the IMF's Paper, even though the work produced gives impetus to framing a separate debate and from that debate begging particular questions to be asked and other matters to be raised.

My position on this entire affair, leaning from the work produced by the IMF, is done strictly to bring to the attention of the public a parallax position that may be seen as distorted or an aberration of the original issue. But, a part of the issue it is, even though one may feel it too distant or unrelated.

For instance, we're all not lazy loafs, unskilled and unprofessional and choose to spend our time drinking rum, smoking marijuana and taking days off because we can. And, on the other side, we are not mean, maniacal and spiteful policy makers that want to hog up all of the money for ourselves and leave the workers to eat cake like we do! This type of language and sentiment is unhelpful.

In this spirit moving forward, the IMF paper went into great detail to collect, collate and analyse data on labour market trends in the region. Some data was more readily available, and others sparse or simply unavailable. In either extreme case, the data was enough to extract a rich amount of inferences from the data set and the subsequent correlations it brought to the fore.

One theme that's prominent throughout the paper is: Employment output-elasticity. Or, in other terms, the extent to which employed persons' (hired workers or labourers) output (the amount, rate and level they are productive based on how and what they produce) is elastic/inelastic (negatively or positively responsive to external and or internal determinants and/or shocks) to the extent to which it impacts, or is impacted by, GDP and/or GDP growth determinants in the macro-economic sense, or in the micro-economic sense, basic company performance indicators: The bottom line and the inputs or variables that affect the bottom line.

One thing that jumps out is the correlation of employment elasticity of The Bahamas, being the lowest correlated point observed in the data set with Jamaica being the highest. Directly speaking, with any change in real growth through cyclical periods, Bahamian employment is least likely to be impacted in any significant way.

This is a very interesting outcome from this study and says a great deal about the Bahamian economy. For starters, it lends to the idea that we are over-saturated with entrenched workers in many areas of our economy, particularly the services and governmental sectors. A lack of employment-skills dynamism and services diversification is and was always a factor in Bahamian labour and employment dynamics.

This also gives the perception that it doesn't matter that if 1 person is employed on a particular task, or 10: The same level of output will be evidenced in our GDP estimates and other output and growth indicators. Essentially, we are doing the very little we are expected to do with an over-saturation of workers in those areas.

In Jamaica's case, it's the exact opposite. Which leads to another interesting piece of information brought out by the Working Paper: The distribution of elasticity of employment over time.

Without being too technical, the second method used is a regression model over time to pin-point the rate at which growth and employment were evidenced over time.

The policies that spurred these dynamics could not be explained in the paper, but highlighting the lowest correlated over time in Jamaica and the highest correlated over time in Trinidad and Tobago, the authors did make mention of the Trinidadian government implementing employment growth initiatives that were independent of regular cyclical periods.

Further to all of this, Caribbean countries that utilized their natural resources, like Trinidad and Tobago, were seen as countries that were able to control the dynamics of employment and employment output outside of the regular business cycles and other related cyclical periods.

To further solidify this observation was that over the last decade, real growth has been historically low, generating low employment growth. During 2002–2012, average real growth ranges from 0.62 percent in the Bahamas to 4.7 percent in Trinidad and Tobago.

The Bahamas has not utilized a great deal of its natural resources in a nationalistic sense, while Trinidad and Tobago has. Neither has Barbados (due to a lack of natural resources to exploit) to any large extent but Jamaica to a larger degree, both countries being on the sub-side of opposite ends of the spectrum.

While it has been reported that over the medium term real GDP growth is projected over the entire country set, one must ask the question based on this analysis is: Where will this growth be seen? Which sectors will be at the lead of this growth? Also, based on the sectors identified for growth, will this truly impact the labour market in a substantial way?

Knowing what we know now, removing constraints to innovation and investment is also a policy recommendation for the region. This is key to being able to open the doors of opportunity for development led employment growth, but also keeping our citizenry employed with worthwhile endeavours and in a sense, not going on labour strikes and other forms of disruptive behaviour.

Whatever happens as a result of these factors, natural resources are critical to impacting employment growth and managing employment elasticity. In fact, this was the key inference suggested from the paper.

Labour unions in services dominated countries must be cognizant, particularly in non-resource rich and natural resource producing countries, that labour input at the widest margins does not significantly impact real GDP growth. And from this author's estimation, an over-saturation of employees may harm growth if this study is launched into another study that pinpoints the effects of labour and employment saturation.

I must also caution that, over time, if counter-cyclical measures aren't put in place to satisfy labour and employment demands, regardless of the benefits negotiated through the various labour unions in conjunction with the government, strikes and other work-related disruptions will become more severe and protracted as the years progress.

Saturday, October 11, 2014

Land prices in The Bahamas: Thinking about the issues and possibilities.

As Jimmy McMillan would say as a slogan when running for Governor of New York back in 2010 with the political party of the same name: "The Rent is too damn high!" We feel you Jimmy. We can also say here in The Bahamas that the price of property is too damn high. Just too damn high!

The price of land has sky-rocketed in The Bahamas over the last 25 years. Many parcels of land today, in middle to lower-middle income areas without a dwelling on top, can fetch any where from between $70 thousand to $95 thousand dollars. In fact, a piece of property 40 by 80 in a middle-income area in 1985 went for anywhere between $2,500 to $3,000 dollars. Yup, the generation post 1995 was given a raw deal with this. A raw and dirty deal.

For upper scale areas, parcels of land can start from $200 thousand dollars and upwards to $1 to $2 million dollars. This is also without dwelling on it.

Based on The Bahamas's GDP per capita at a very liberal $22 thousand dollars (a grossly inflated estimation of GDP per capita as it doesn't take into consideration the over-saturation of incomes from the top 20% high-wage earners compared to the bottom 70%), leveraging for land becomes more than a task. It's almost impossible for average families to purchase land and a home of their dreams without being in debt to banks or land developers for years on years.

This, coupled with the perpetual and seemingly ubiquitous soft-services economy, an economy yet to fully rebound from the ravages of the 2008 economic collapse and financial crisis, we have a dire and particularly important issue of land-reform that's desperately needed in The Bahamas.

Land reform, or the intention of land reform, has not been missed by all and sundry. In fact, recent developments based on rulings of two major and long-standing cases (one of these matters dating back to the early 1980's) for a major land development company in The Bahamas, Arawak Homes and their associated company, Eleuthera Properties Ltd., drove the critical issue of land reform home to many Bahamians.

Without going into the details of the particular court cases, the major issue involved a process called "Quieting Titles". A process by which a person can transfer title of a said property through the Supreme Court though particular means. Whether through just occupying the land for a considerable amount of time, or just through being interested in the land and the original property owners are uninterested in doing any thing with it, for some reason or the other.

Thus was the case for Eleuthera Properties Ltd. in North Eleuthera and their claim and subsequent acquisition, through a Supreme Court ruling, of nearly 2500 acres of land.

A second case, involving the parent company, Arawak Homes, is a more acute case of Quieting Titles and involved the purchase and re-sale of property that was disputed from the onset. This court case involved a particularly controversial area in The Bahamas- Pinewood Gardens. An area where someone put a petition to Quiet the land that was already, reportedly, purchased and owned by Arawak Homes.

This issue also underscored the need for a proper land registry in The Bahamas and a revamping of the Registrar General's office and the department charged with insuring the integrity and validity of property titles.

So, here we have it, one company being both a victim and claimant in two separate court cases surrounding the Quieting of Titles conundrum, where the same company came out the victor in both of the court proceedings.

This prompted the president of Arawak Homes, Mr. Franklyn Wilson, to cry about the abuses of Quieting Titles in The Bahamas. And we cry with him too! Really!

All of this, in addition to other matters surrounding the murky process of obtaining Crown Land from the central government; the lack of commitment by policy makers and the judiciary in finding a workable, best-case-solution to Generation Property (with Generation Property being land handed down from former plantation owners to their slaves primarily); and another issue of contention, The International Persons Landholding Act. of 1993 (making land purchases and ownership less cumbersome for foreigners), which repealed the former Immovable Properties Act., and is a key reason behind the explosion of land prices in The Bahamas.

In fact, with current prices taken into consideration with the Landholding Act of 1993, a Realtor from one of the most prominent real estate companies, H.G. Christie, lamented on the now 90/10 split in property sales with the 90% of sales being high-end North American, Canadian and European clients.

What the Realtor didn't explain during his lamentations was whether or not this 90/10 split was based on the numbers of individuals or entities buying property; or, in other words, 90 high-end buyers to 10 local buyers. Or was it a case of sheer value and profit; For example, 90% of his profit is realized from high-end buyers as opposed to 10% of his profit from local buyers.

Explaining what that Realtor means can help a great deal towards understanding how severe the issue is. It also must be noted that H.G. Christie specializes in the high-end market in any event.

Be that as it may, without question, all of this has certainly opened the market to fraudulent activity with particularly lengthy and confusing court cases as the fight for property for Bahamians becomes more heated and contentious as the years progress.

I'm not going to pretend that I have the solutions to all of these issues. I won't even give the impression that I can give you a workable solution to any of them. But I would like for my reading audience to consider this formula for helping with reducing the overall cost for average Bahamian families. This formula may prove fruitful for the rest of The Caribbean and Latin America at large, where developing country stagnation issues and bottlenecks are severe in many instances.

One way in which we can look to reducing the cost of land, without amending the International Persons Landholding Act., is by policy makers creating a "race to the bottom" scenario. A scenario whereby real estate companies, banks, lawyers, relevant stakeholders along with the government create an atmosphere through capping fees and interest rates for land valued and zoned in particular areas.

For example, hypothetically speaking, pieces of land in "Eastern Estates", deemed as a historically Bahamian area for residences and businesses, the rates at which the stakeholders can extract service charges and other processing fees should be capped at a certain value.

A Realtor typically asks for anywhere from 7% to 10% for sales, and the lawyer asks for 2-3% on top of that.

Lets say that a piece of property worth $100 thousand typically attracts 10% total fees from the Realtor, Lawyer, etc. But, if mandated that sales of $100 thousand should not exceed 5%, or $5 thousand; and sales for property valued at $50 thousand shall be equal to, but no less than, 11% of the total value of the property. That's $5 thousand five hundred. Parties involved would actually make more money per value off of the property at a lower price than they would make selling at the higher price.

Following the rationale of something of this nature needs to have several other factors put into consideration. One in particular is at which rates would it be profitable for a Realtor to sell land at structured price ranges? Without a doubt discussion and analysis into the socioeconomic dynamics of property sales should be broached with the Bahamas Real Estate Association.

A second issue for consideration is with regard to what price range would this ascending fees scale stop? This can also be easily appreciated by both policy maker and the Real Estate Association.

Last, but not least and what should be atop the pile for consideration with both the former, is managing the expectations and the articulation of what regulations vs. free-market policies can mean for the Real Estate industry. This is important. Important particularly with regard to persons that bought land at a higher price, but have yet done nothing with regard to it because they do not have the financial headroom.

One can see persons lashing back at what would be rightfully presumed to be government interference with price mechanisms in the industry. But as it stands now, with all of the prevailing factors surrounding the Bahamian economy, from flagging employment to inflation to socio-political behavior that has become injurious to investment and entrepreneurs, standing around doing nothing while property prices remain at virtually un-buyable prices hurts all involved.

As it stands now however, property sales under a different policy regime and arrangement is a better way forward than keeping the new status-quo of high prices and lack of flexibility for Bahamians looking for decent and affordable homes and property of their choice in their own country.

Saturday, October 4, 2014

Crime pays, but costs the society a great deal!

A recent article by a contributor to Project Syndicate, an Economic and Political Think Tank and Journal, Professor Bjørn Lomborg, from the Copenhagen Consensus Centre, brought to our attention a recent study on the economic and financial costs associated with violent crime, in a recent article titled: The Economics of Violence.

His ruminations were born out of the current conflicts around the world, from the wars in Iraq and Afghanistan, to the upheaval in the Ukraine and Crimea and how those conflicts affect local economies and the global economy, at large.

He noted that, while it may come as a surprise to some, wars and large scale conflicts, from air-raids to pogroms, cost less than the combined costs associated with murder; domestic violence; and other forms of country-level violence and crime. He notes that it is estimated that nine people are killed in interpersonal violence for every battlefield death due to civil war, and one child is killed for every two combatants.

When we analyse murder rates world wide, it makes sentiments like the ones expressed by Lomborg seem valid.

It almost seems understood that Africa, Latin America and the Caribbean, by region, are ranked the highest in violent crime and murder. United Nations estimates show us the top 5 highest homicide rate by region per 100,000 persons in 2011:
    Southern Africa31.0
    Central America26.5
    South America22.6
    Middle Africa18.5
    Caribbean15.8

In an article written by this author in 2011, "Is crime and economic concern?", I noted that in the Caribbean, and in particular Jamaica, Saint Kits and Nevis and The Bahamas, as reported by the UNODC, were ranked well above the average murder rate for the region, with rates of 43, 35 and 22 per 100,000 persons respectively.

That has since changed! The murder rates have increased since that UN report in 2011, and now stand at 62 in Saint Kits and Nevis; and in The Bahamas 37 per 100,000 persons as per the UN's latest Global Study on Homicide, 2014.  However, there was a slight decrease in Jamaica at 41 per 100,000 persons.

We should also add Belize, second behind Saint Kits n Nevis at 39 per 100,000 persons, and with the former capital, Belize City, at over 105 per 100,000 persons.

These are very sad and stark statistics.

videoOne has to ask: Are people from developing countries in Africa, Latin America and the Caribbean just evil people? Have we lost control? Are we just violent people with no understanding, no reason, and no mercy? South East Asia is just as underdeveloped in many areas as some parts of the Caribbean and Latin America, but they have lower crime rates and lower costs associated. Why is the epidemic of violent crime so pervasive as it relates to us?

I guess we can never truly wrap our minds around this. But, we can wrap our minds around the notation of Lomborg and the works highlighted on the economic value of violence and victim costs produced by Kathryn McCollister, et al, 2010, and primarily from the work of James Fearon and Anne Hoeffler, 2014 and their Conflict and Violence Assessment paper.

The documents sourced to produce these works are extensive. Impressive, to say the very least. I'm pleased to have it cross my inbox and thrilled that it induced me to find more information as I wrote this article. It was as refreshing as a cool glass of water on a hot summer's day.

The reason why I was so impressed with the work was that the main thrust of the assessment was centred on the economic cost of crime.

A very strong case for the economic costs associated with crime at many different levels was made; from domestic crime, to child abuse (fatal and non fatal) and violent crime like rape and murder.

These costs were separated between "tangible costs" and "intangible costs": Tangible costs consisted of victim costs, criminal justice system costs and crime career costs. Intangible costs factored were with regard to the pain and suffering costs and corrected risk of homicide costs; or, in other words, the costs associated with crime and violence prevention.

Elaborating point for point on each assumed variable would be too long and cumbersome for this article. So I won't. I just won't. I can't, even if I wanted to. Don't be angry with me, but I really want you to stay awake during this op-ed.

The 2010 study by McCollister found that, in America, $9 million was estimated as a value of economic losses as a result of one murder over the course of the life and working expectancy of both the criminal and victims. This, of course, is a means average. Murders cost more than burglary, rape more than pickpocketing, etc.. This is understood!

Without saying, we can't compare US costs to Bahamian costs, or the US to any other developing country for that matter. But if we scale down to relative size by virtue of GDP, taking the methodology as is, we can see what that $9 million dollar figure per murder can look like in The Bahamas; even bearing in mind the differences in the way criminal investigations are treated, the differences in the legal system and the lack of personal protection and handguns for citizens.

A figure of $423 thousand per murder committed in The Bahamas was estimated. This is 20 times the GDP per capita for the Bahamas. If we take into account the highest recorded murder count of 127 in 2011, we would have something like $53 million. 

This is below the regional average for Latin America and Caribbean, which is somewhat good news. But with the murder rate being extremely high, and with a small economy relative to other countries,  I am reminded that, at times, statistical representations can give you the wrong impression of the facts, if interpreted incorrectly.

Let's also look at the total amount of crime incidents reported for the year, 2011. As reported in the "Bahamas 2012 Crime and Safety Report", there was 11,951 cases of hard crimes reported in 2011. These crimes include assaults and murder as a result of both domestic and non domestic violence.

If we add the amount of child abuse cases reported for that year, 636, we can move closer to the methodological criteria that the researchers used. Also, if we take into account "white collar crime", a total of 448 reported in 2012, and assuming that the differences are negligible between 2012 and 2011, we have a total of 13,305 cases, or thereabouts, of total crimes reported.

If we were to take only robbery, at a total cost of $9.5 million dollars and rape at nearly $15 million dollars, add it to the total cost of murder at $53 million dollars and after calculations, we would have some very interesting figures to play with.

Unless you haven't already totalled, the amount is well over $77 million dollars in economic value and the subsequent welfare losses of victims as a result of the amount of those crimes committed over time. That's nearly 1% of Bahamian GDP!

This multi-million dollar figure amounts to nearly $2 million dollars a year of future earnings lost if we take into consideration the working age expectancy of 40 years. That's 25% of the budget allocated to the Royal Bahamas Police Force.

With an average inflation rate of just over 4 % per year in The Bahamas, by the 40th year an estimated $9 million dollars would have been lost over time if crime statistics remain constant.

This is not to say that we are losing $2 million dollars a year of GDP, just that $2 million dollars per year of economic activity we are projected to not having, and will not have for the future from just one year of crime.

This also does not take into account the already compounded economic losses of crime before and after 2011, which also needs to be factored in. Continue to calculate per year, the value we have already lost and expected to lose, the figures would be astronomical if we take the average from previous years and project crime rates for following years.

The most startling thing is that this is just representative of crimes against a person or business, and not state-crime: For example, tax evasion, false declarations to revenue agencies like Customs and the National Insurance Board, documentation fraud and the like. My word!

Setting aside the dollars and cents of it all, loved ones that were lost and how it affects their family and friends can never be quantified. My deepest sympathies for those grieving and dealing with loss. No amount of money can replace a loved one. Ever!

Saturday, September 27, 2014

What has The Bahamas done post economic crisis? (With Audio)

The financial and economic crisis of 2008 seems much of an afterthought since first impact. But also, now that the USA, at least, is coming slowly back to normal- from the financial markets to the labour markets- people have forgotten to a large degree what actually happened and why it hit so hard, so deep and for so long.

The Bahamas, and I can speak generally for Caribbean countries and our friends in Latin America, felt the brunt of this economic crisis.

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For starters, The Bahamas is significantly tied to the USA. A great deal of foreign investors with American ties were impacted by the crisis, and a significant portion of our local investors have investment and financial ties in America.

Large investments like the up-coming BahaMar development, is an example of a budding jewel that was significantly impacted by the crisis. Because as American investors and financiers lost appetite, BahaMar's teams' financing efforts shifted to China and in particular the Export-Import Bank of China.

In addition, almost all of our large companies, from importing businesses, large financial institutions (banks and insurance), manufacturers, construction and other services related companies, have subsidiaries in the USA- most notably Florida.

More importantly, we are an importing country. From food to other consumer related products, The Bahamas imports nearly all of it for domestic consumption. This is critical.

So, as it stands now, it is well within reason for Bahamians to ponder not only the likelihood of the events of 2008 happening again. But also, what will we do when it does happen again, and what institutions have we, or can we, put in place to ensure that the damage to our economic and social fabric is minimal.

Just a historical reminder on how the financial crisis and subsequent economic collapse happened: Large US investment banks were betting heavily on sub-prime mortgage loans and other mortgage backed securities.

These securities turned sour because they were economically rooted on the basis that these housing starts and the subsequent loans/debt obligations were handed to lower-income earners- as a way to give them a piece of the USA to call their own. A worthy cause!

However, as the US political cycle kicked in in late 2007, and the customary retrenchment of businesses that wanted to keep their investments and expansions at a minimum, awaiting the next congressional session and political administration, things started to change. This was topped on a softening of employment from 2006-2007, and in addition, to a slowdown in new business starts and business failures; from Silicon Valley in California to the Oil Shales in Pennsylvania.

Just to validate from a naked perspective the US political cycle dynamic, over the last 12 US presidential elections, dating back to 1968, we have noticed some interesting trends.

There were 5 noticeable drops in the real GDP growth rate prior to the year of the election. Also, more startling over the last 12 elections, there were 8 significant reductions, or negligible changes, of the real GDP growth rate in the US the following year after the election.

A great deal of inferences can be drawn from these seemingly random and unconnected occurrences, but fully understand that these occurrences happen more frequently than one can just flat out deny.

More startling, is that out of the 8 occurrences that a drop in real GDP growth was recorded, there were 5 occurrences of when the political party has changed office and the growth rate was negatively impacted- from GOP to Democrat and vice versa.

There is much more that one can drill down and extract from this phenomenon, but the evidence is becoming clearer from even this naked eye.

When you compare all of this to Bahamian real GDP growth rates, the gyrations are incredibly significant. In fact, Bahamian growth rates are not only correlated with US election and business cycles, through deeper analysis, but we are even more significantly impacted by US growth rates, born through their election and business cycles, than we are with our own election and domestically generated business cycles in almost every single instance since 1990.

This is enough information and evidence to make a lot of assumptions and draw a lot of inferences as to how important monitoring these cycles are.

This is where issues of safeguarding the Bahamian economy becomes critically important, monitoring and evaluating in a deeper and more fundamental way of both developments in the USA and The Bahamas. Particularly around the election cycle and subsequent business cycle, or other related business and economic phenomenon, we must base these on economic and social fundamentals and with that draw scenarios in which these issues change and how that may effect us. From minor changes to more dramatic and worst case scenarios.

What can we do with this new information? Knowing on top of these cycle phenomena that the USA simply can't be counted on, solely and wholly, as a bell-weather for Bahamian economic development due to the fact that it puts policy makers in a position that they cannot control, but a position that is seemingly inevitable in certain times and intervals?

For starters, the agencies responsible for monitoring international markets must be enhanced with new mandates and tools to monitor these markets effectively. New partnerships with other international financial agencies and agencies that monitor international markets must be critical for sharing best practices and gathering actionable data in real time.

New buffer requirements must be factored into the Know Your Customer (KYC) policies. Buffer requirements that adds critical value to the judgements based on the whole value of investors exposed to international markets and other anchor investments they are tied to.

The CLICO debacle comes to mind in terms of companies that were over-exposed in several markets, but ultimately local markets took a hit because the quality of the information presented didn't speak to the dangers the CLICO business model presented through the virtue of their financial statements and the true value of their parent company's balance sheet and assets.

An international/political affairs and economic unit must be created, or enhanced, and also must play a more fundamental role in our international monitoring and assessment regime. Often times regulatory regimes neglect the important function of political and government action within foreign jurisdictions. The roles of Foreign Affairs, Trade and International Finance watch-dog agencies must be enhanced based on these principles and formulas must be created within their risk matrix.

A new partnership with banks and other financial institutions must be formalized with the central bank and other international development monitoring agencies. Formalized on the basis of information sharing, with new data and assessment tools that they both share. KYC just doesn't extend far enough in terms of data analysis and data compilation of foreign investors.

We must see The Bahamas as not isolated from the global economy, and no Caribbean country should either. In fact, no matter the xenophobia and protectionist measures in place, once Caribbean countries are dependant on foreign direct investment and international NGO's for development assistance, we will never be immune from external shocks.

To some extent, neither are the USA and European countries immune to external shocks. On the contrary, they are enmeshed into the global system. Where they are more developed and sophisticated in dealing with these issues is not within their financial wealth and power status, but because they have developed agencies with networks and systems that buffer them from all out collapse, they are able to insulate themselves from most of the rigours of economic turbulence.

Moving forward post crisis, how Caribbean countries manage and deal with the catalysts of crisis and significant polyps before they become incurable tumours and full blown cancers, is where we should begin to put  our minds around reforms for the better. A new order of things!

Saturday, September 20, 2014

Moody's has The Bahamas in a mellow mood.

Moody's ratings agency, the agency that assesses credit worthiness of countries and large multi-national corporations, in early September downgraded The Bahamas's unsecured credit rating to Baa2 from Baa1. Two steps away from junk bond status.

This appears to be a minor change over the course of the last few months as some would think. However, incremental changes, for such a strongly foundational country like The Bahamas, is astonishingly noteworthy. Noteworthy in that The Bahamas being ranked 3rd in the Western Hemisphere in GDP per capita, and with the Bahamian dollar being pegged to the US dollar, sentiments of economic unsoundness and lack of faith in The Bahamas by Moody's makes us all stand up and ask questions about The Bahamas's real position in terms of economic viability- domestically and globally.

The analogy of the frog in a boiling pot of water comes to mind. That being that when you put a frog in a pot of cold water, place it on the stove and turn up the heat, the frog doesn't know it's being slowly cooked until it is too late. The frog is hard-boiled cooked and he didn't feel a thing. Dead!

Food for folks that love frog legs, at least one would like to make light. But it isn't a joke. We're talking about a country here, the seemingly inability of that country to turn things around based on historical performances and data, good and bad, and the prospective of it changing course for an identifiable better along with the idea of current steps being taken to address the problem lending itself to this issue.

I must give a backdrop on the way ratings agencies like Moody's, Standards and Poor's, Fitch, Morning Star, etc... work.

For starters, they all have their particular brand or template of analytical tools, but seldom do they deviate from fundamental and standard analytical tools and templates seen from regular statistical modelling and, in modern cases, statistical packages and software like SPSS, STATA, RATS and E-views, just to name a few.

There are certain times where economic data and statistics are not readily available, such is the case in The Bahamas where hard data and historical data is hard to come by.

In times when there is a lack of data, and even with readily available data, ratings agencies use qualitative judgments on the progress of certain initiatives. For example, the rate in which structural, fiscal and economic reforms are taking place.

In The Bahamas's case, how far are we, realistically, based on country comparisons and with regard to certain infrastructure that are requirements for successfully executing on tax reforms like Value Added Tax (VAT)? How far are they with overall tax and spending reforms?

Another example is with regard to the overall business climate, the amount of business constraints, bureaucratic red tape and bottlenecks to investments that may hinder or enhance economic activity.

Are the policy makers showing signs of progress on any of these issues, or is it just consistent feinting with the left jab without the Sunday punch following?

With all of that being said, I must also say clearly that these ratings and assessments are not done in a vacuum. Ratings agencies just don't stick their index finger in the air and then decide that the weather is right for a negative review. They are not handing out negative ratings because Moody's and the USA hate The Bahamas and wish to see it fail and because we don't allow them to do as they wish. They don't have a vendetta out against The Bahamas. Disabuse yourself of that notion. It's just not true along with it sounding extremely conspiratorial.

In fact, a quote from James Barrett Reston sums up most American (and in some instances G-8 countries) sentiments on Latin America and the Caribbean: "The people of the United States will do anything for Latin America, except read about it.” A little crude and confidence blowing, but true to a significantly important degree.   

Ratings agencies like Moody's create these ratings because of one simple reason: Money! The bottom line. Pure and simple financial reasons. No more, no less.

You see? Sovereign credit ratings are what investors look at in terms of a nation's ability to pay it's debt. Nothing says debt more than Sovereign Bonds.

Sovereign bonds are one of the primary tool used in macro-economic policy for countries to borrow money. From satiating anxious labour unions with salary increases or other benefits, or capital works and/or other social projects, they all are valid and necessary spending initiatives.

Poor credit ratings affect bonds in terms of the lower the credit rating, or the rate at which a country is seen as being able to pay off debt, increases the interest rate requested at which the investor purchases these bonds. The higher the interest rate asked for and to be paid back to the investor on those bonds, the more it costs the government.

What should be a red-flag to us as citizens is that, as reported by The Central Bank, The Bahamas Government has issued over $3 billion dollars worth of Government Bonds with 35 of those issues to reach maturity by 2016, nearly 50 to reach maturity by 2021 and over 80 to reach maturity from 2021 and beyond as far as the year 2037.

This also indicates that as the country has borrowed through bonds, the interest rates have certainly increased, as we are pledged deeper and deeper in debt as the years progress. This further indicates that certain concerns exist about the future viability of The Bahamas as the debt pledges become deeper and more severe and the debt cycle will be harder and harder to spin out of.

What also makes it more concerning is that The Bahamas is attached to the international markets, whether directly or indirectly.

For example, while Bahamian bonds are denominated in Bahamian dollars, and only local institutions and investors are allowed to purchase Bahamian bonds- at least from what we are told. It doesn't mutually signify that those local institutions/investors aren't tied to other international investors, companies and/or investments.

While Bahamian bonds are mere drops in the bucket globally, ratings agencies like Moody's have a duty to report on those activities that investors making significant, but relatively substantial, investments and how those ripple through other exposed investments and how much risk is involved.

Whatever the particular cases may be, it is clear that, yet again, this recent downgrade is not a drill. People's lives are in a certain balance, in real time. Slow and deliberate time. But real time, none the less.

We should all be sober in our reasoning and realize where we are, what we're doing and how do we get ourselves out of this particular bind. It is doable. Certainly doable. But the will must be there to turn the tide, along with realizing what the facts and issues are for what they are.

Saturday, September 13, 2014

Value Added Tax: Fears and Solutions!

The Value Added Tax (VAT) initiative has taken some interesting twists and turns down the road of reform, from the VAT Bill tabled in the House of Assembly in late August, 2014 with an implementation date of January, 2015- a change from the initial July, 2014 date for implementation.

The road hasn't been easy, to say the very least. But, it's a road that must be travelled and all parties involved should look at it as a solution to a lot of the fiscal problems and financial management issues we face in The Bahamas.

Be that as it may, the messaging of VAT with the subsequent reform efforts it is supposed to usher in has not been articulated extensively enough.

The Financial Secretary of The Bahamas, John Rolle, is the key spokesperson for the initiative. A very brilliant man by all accounts from all sides of the Bahamian divide. However, public speaking and presentation is might not be his forte. 

Apart from him, no one else has been more prominent in this exercise. Everyone else is virtually non-existent in this entire affair;  the VAT Coordinator is MIA, if there is one; The Minister and Minister of State for Finance are consumed with political and policy agendas of the entire country as they should be; and the international consultants that were engaged on this matter should be more forthcoming.

I wish, however, for those thinking hell and war-zone, with the main spokesperson seeming to be a little disconnected with his knowledge, to pump their breaks. Hold on for just one minute. Here's why!

For starters, it's not as if we all don't already know, maybe not as much as Minister of State Halkitis and Mr. Rolle, where the Bahamas stands with regard to public finances. Years and years of waste, mismanagement, revenue leakages and high interest rates was met by this current political administration, some of it theirs and a good portion of it from previous administrations.

It's also not a secret that The Bahamas is one of the least taxed jurisdictions in the Caribbean/North American region. With figures provided by the Heritage Foundation, Haiti is estimated being the least with a 9.4% tax to GDP, Barbados being the most with 32.6%. The Bahamas is in third place with a 18.7% tax to GDP behind the Dominican Republic with a 12% tax to GDP. The USA is situated at just about 30%.

These figures do not indicate, however, the amount of revenue collected as a result of the tax to GDP rates. In fact, the IMF in their Staff Report from 2013, estimate that less than 50% of all revenue is collected through our various revenue collection agencies. Some feel that figure is a very liberal estimate.

Without a doubt, even with the recent downgrade of Moody's report that puts the Bahamas Sovereign Credit Rating at Baa2, just two tiers above junk bond status, again shows you the need for reform in a fundamental and most significant way.

The messaging on taxation reform, VAT, revenue enhancement measures and necessary budgeting reforms, is not going as well as one would have anticipated. For obvious reasons, the content is sometimes difficult to grasp, but also the presentations have been somewhat terse in their representations, almost as a means to bring people to an understanding of the gravity of the situation in a concise manner in the shortest time as possible.

Some hopeful suggestions at this time for bridging this gap is necessary.

For starters, what we would wish to see is more written commentary by the VAT team on all imparted information and tasks completed thus far. Aside from the public forums where presenters are made available to the public, written commentary adds not only a piece of information people can digest and study on their own, but also a way where points can be articulated more clearly as opposed to the rabble-rousing atmosphere of Town Hall meetings. This current political administration has met this extremely messy and controversial challenge head on. We have to give them that!

Secondly, social media should not only used, but maximized and utilized effectively. Particularly with regard to visual media, video presentations and junkets of news releases, guidance notes and their relevant updates and changes. With the advent of electronic information highways and social media, it lends to regular print and television media the added kick as information is readily and easily stored and made accessible to people that wish to review at a later date.

Lastly, and certainly not the least, picture graphs, flow charts, process maps and the like should be used more effectively. Particularly with regard to the VAT mechanisms- point of entry for goods, and the payment process and point of sales for goods and services. And also for the VAT return mechanism and how that should work.

A host of other initiatives could be undertaken to improve the VAT's messaging and optics of this entire initiative. Even though there are persons paid to coordinate this, we must take it upon ourselves and act responsibly as citizens: Understand the weaknesses; pin-point where efficiencies and lessons can be drawn; and work towards minimalizing the fallout as opposed to wholesale destruction and chaos if not handled properly.

We owe our country our best efforts, despite the bottlenecks, the psychological damage already done by even the slightest intimation of reform, the personalities that may invade the process, and the political fallout from particular interest groups, all of which can become very problematic currently and for the future.

Friday, November 1, 2013

It's almost been a year!

Hi guys,

It was almost a year since I last made comments on this board. I'm still alive, very much so. Just have been swamped with life.

Fear not, hopefully we can post more information as the months progress towards the end of the year.

Cheers!

Youri