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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.
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