Downgrades and debt defaults

Last week The Bahamas was downgraded just hours after its general election result was confirmed leading people to ask if it was due to the election result, when the Government changed from the Free National Movement (FNM) to the Progressive Liberal Party (PLP). This is highly unlikely, as the rating meeting had occurred the day before the election and in any case the rating agencies typically have well-structured processes.

One of the reasons it was not entirely unreasonable for the question to be asked however was that the PLP manifesto had included a promise of a reduction in VAT (their equivalent of our GCT) from 12 to 10 per cent, while the country ran an enormous deficit last fiscal year (to end June) and the previous government forecast another enormous deficit this fiscal year. Interestingly, however, The Bahamas now has fiscal responsibility legislation, and is almost unique in the Caribbean in putting this legislation in place without being in an International Monetary Fund (IMF) programme.

Reducing taxes here would therefore mean raising taxes elsewhere as occurred with a similar but very different election winning promise in Jamaica (the famous raising the income tax threshold to $1.5 million). The key difference is that the most obvious tax to put in its place in The Bahamas would be income tax (The Bahamas has none) to make this promise work, but this would be a very radical change and very unlikely currently. So, in short, The Bahamas would have severe difficulty in going in the opposite direction to Jamaica on taxation.

Since the election, Bahamas debt is down around five points or roughly five per cent, as first a Gleaner article articulating a high risk of default for The Bahamas and Trinidad appeared, followed by global weakness in emerging market debt. One key regional debt player, however, noted we don’t see any risk of default in the short run, and that in the medium term The Bahamas has many paths to avoid getting into that situation before there is a real risk of default. I agree.

Nevertheless, The Bahamas has some clear structural issues which neither government has managed to address over the last two decades. A social partnership approach, incorporating a version of our successful economic programme oversight committee (EPOC), might be something they should look seriously at. There is now some local support in The Bahamas, on radio shows and in newspaper articles, for looking carefully at their debt issue. This is particularly important for a country with a pegged currency, which wants to sustain its one to one relationship with the US dollar.

It is not only The Bahamas that should look seriously at such an approach. Jamaica has allowed its social partnership agreement to expire during the pandemic, and has not put anything in place to replace it. It is understandable that the Government has been very busy, and perhaps has not the bandwidth to engage on this issue as there have been so many other pressing issues. However, I think in the current low trust environment, particularly on the key element of trust creation through joint problem-solving, it is a mistake to let it lie fallow for much longer. This is particularly the case when there is an excellent starting point to begin the conversation — namely the COVID Economic Recovery Task force report — as well as the crime committee chaired by JCC President Lloyd Distant. Solutions to the COVID surge, the economic recovery and crime are the obvious topics, all wrapped up in one of the reports key themes being how to encourage digitisation, particularly relevant in this back to school period.

Finance Minister Dr Nigel Clarke would no doubt argue that The Bahamas downgrade shows why his conservative fiscal approach was necessary in an uncertain world. He might also cite the recent Evergrande default as a case in point about a globally uncertain world where no one knows what might trigger the next black swan.

It is worth looking in a little detail at Evergrande, a Chinese property developer turned financial conglomerate. Evergrande owes US $300 billion to 126 banks globally. The last time I heard of this number of banks lending to one entity was when I was in Trinidad in August 2008 and saw a worried looking Lawrence Duprey, the then owner of regional Trinidadian financial conglomerate Clico, walking down the stairs, not that long before their collapse. In his case it was single-digit billions of course. Currently, however, Evergrande does not look like a “Lehman” moment, but it is time to pay attention.

Evergrande had what its regulator called a high shareholding concentration, being 95 per cent owned by its founder and 18 other individuals, mainly his tycoon friends. It had gained control of a regional Chinese bank, and also sold non-transparent “wealth management products”. Its financing included customer deposits on millions of apartments, not yet delivered, and a cash strain driven by an enormous inventory of unsold real estate. We will look into Evergrande in more detail next week to see if we can tease out any lessons on share price manipulation, transparency, disclosure and governance that would be applicable locally.