The Bahamian Economy: What, me worry?

No one in The Bahamas is in the mood for more bad news, especially after Hurricane Irene swept through leaving significant damage that some estimate to be well in the millions. But bad news is what we had with the recent downgrade from the ratings agency Moody's on The Bahamas Sovereign Bonds to A3 status.

I remember back in mid-May, 2007 The Bahamas put up a Sovereign Bond package for investors and immediately gobbled up. I'm not sure if the same type of exuberance for Bahamian Bonds will hold true today.

For general information, issuing Sovereign Bonds is a way in which a country can raise money from investors to fund public operations. Aside from direct public borrowing- which can also be buttressed by the application of bonds into the loan structure- it is a very effective way in which a government can obtain money to do things it needs to do.

The main problem with Bahamian bonds being downgraded A3 status- which is the start of the second tier on the Moody's ratings chart- is that investors may see Bahamian Bonds as unstable, with the possibility of the government defaulting on paying back Bond Investors that have already invested.

In 2009 Standard & Poor's - the somewhat disgraced ratings agency that has recently downgraded The United States Sovereign Bonds as well in an act that many call political in nature- also downgraded The Bahamas Sovereign Bond ratings to BBB+, the equivalent to the recent Moody's rating.

The Moody's statement on why they downgraded The Bahamas was based on three factors: "1. The significant run up in government debt levels in recent years; 2. The country's limited growth prospects; 3. The challenges the government is likely to face in raising revenues."

The way Sovereign Bonds work is that investors purchase these bonds, just like a regular investment that’s expected to make a return. What's important with this is that the yield, or in other words the interest paid on these bonds, is how investors make money on the returns from that investment.

The dynamic is that as a country's credit worthiness is put into question in a negative way- as it has been with the recent ratings downgrades- investors will look for higher yields in shorter time frames. For example, they may seek bonds that carry 5 percent yield on a 5 year to maturity dated bond over a 5 percent yield on a 10 year maturity dated bond, and even better if they can get a 7 percent yield on a 5 year maturity date and so on and so forth. As reported by The Central Bank, The Bahamas Government has issued over 2.5 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.

The concern over the risk of default in this case is well founded in terms of the ratings downgrade. It’s highly unlikely that an investor would want to be locked into a debt security with an entity that has decreasing means on which to pay that debt.

To some it means nothing. But to others it sends off signals that point to other issues surrounding the Bahamian economy in addition to it all factors highlighting our extensive debt accumulation over the course of the last several years. For example, considering that The Bahamas depends on foreign direct investment, what message do these downgrades send to investors if they want to invest in other portions of the Bahamian economy? How would their investor appetite be affected if there is considerable weakness in the economy?

Other things come to mind as well in terms of addressing this problem in the short and long term. One issue for the short term is confronting the issue of boosting consumer spending. This means not only tackling the astronomical unemployment rate- and the under-employed with the discouraged workers as well- but also boosting real wages in and for the long term.

Another issue is tackling and controlling headline and core inflation for the short and long term respectively. One economist pointed out in January of this year that inflation should not be a main concern, but it rather highlights the signs of recovery in the economy as prices were appreciating. I'm thinking that the exuberance of that statement should be tamped down just a bit.

As we see now- even with lowering oil prices- if boosting consumer spending is to be addressed as a first major step, reducing prices is critical to spurring an appreciation in real wages and increasing employment, most particularly when inflation in The Bahamas is imported and unemployment has little or no effect on inflation domestically. Concentrating on these things are vitally needed in order to generate government revenue in order for the government to have the fiscal headroom to stave off risk of default and meet its other social and regulatory obligations at the same time.

But if investors, both foreign and domestic, would be put off from pumping new money into the Bahamian economy because of these factors aforementioned, then how do we create meaningful jobs, boost consumer spending, while also taking into consideration a softening in the tourism sector? In addition to an increasing dislocation of that tourism product from the main economy (with an increasing bulk of our arrivals choosing the half-day cruise ship stop over, rather than taking that three day trip), how do we assure real investor confidence when tourism is our main industry and is not performing the way it should?

On the other hand the financial services sector has lost jobs and also lost out on business opportunities to other jurisdictions, even though it is virtually un-taxed in comparison.

Another concern is that at the same time with there being no new forms of economic production being presented other than the threat of oil exploration, agriculture is not being given a chance to have a fair start for production for domestic consumption or for export. With that, mostly all other forms of industrial activity and extraction of the natural resources in The Bahamas are being underutilized or under-explored.

Even more concerning- and we have seen this play out in The United States and the debt ceiling debate- is that as politics is becoming more competitive and everyone wants to be credited for the best ideas and the most successful administration, attaining bi-partisan decisions is becoming less and less attainable, which is something that is factored into the determinations on bond ratings most definitely.

Concerns on the long and short term prospects for The Bahamas, even as it is discussed by Moody’s and Standard & Poor’s, should be held by all Bahamians as we begin to see our economic outlook dwindle, and also especially concerning as we see the global economic recovery stall.

One thing is for certain, doing the same things we have been doing and not being more creative and flexible on what can be done in The Bahamas is probably going to create new problems.