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.

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.