BAHAMAS: Jurisdiction Most Exposed To External Fund Pressure.

As published on tribune242.com, Monday 20 April, 2020.

The Bahamas is the world’s most vulnerable tourism-based economy to external financing pressures, a Standard & Poor’s (S&P) study has revealed, and faces “major deterioration” in credit indicators.

S&P, in a report that “stress-tested” countries’ fragility in the face of a COVID-19 tourism-related slowdown, found that The Bahamas gross external financing needs - measured as a percentage of current account receipts plus usable reserves - “worsen more dramatically” than any of the 122 nations assessed.

And this nation’s external indebtedness, involving monies owed to foreign creditors, would also increase by a sum equivalent to more than 30 percent of current account receipts in the worst-case scenario modelled by the rating agency that last Thursday further downgraded The Bahamas’ sovereign creditworthiness.

S&P’s stress testing, which looked at three scenarios based on a reduction in global tourist footfall of 11 percent, 19 percent and 27 percent, respectively, also projected that The Bahamas would suffer the fifth-greatest drop in economic output (gross domestic product) by between 2.37 percent and 5.83 percent depending on which outcome materialised.

While that is less than the 16 percent GDP drop that S&P forecast last week in downgrading The Bahamas, the rating agency also projected that this nation will suffer the 11th greatest “deterioration” in the central government’s debt balance of between 0.63 percent and 1.47 percent in 2020 depending on how severe and prolonged COVID-19 is.

However, S&P’s modelling suggested that greatest impacts and risks facing The Bahamas will be on the external/foreign currency side. Focusing on a country’s external risk, as measured by outside liquidity pressures/financing needs as a percentage of current account receipts and usable reserves, the rating agency ranked this nation as the world’s most vulnerable.

In a worst-case scenario, it said The Bahamas’ gross external financing needs could soar to 58.5 percent of current account receipts and usable reserves in 2020, and 56.58 percent in 2021. “Gross external financing needs worsen most dramatically for the Bahamas,” S&P added, “while the impact is expectedly large for other small tourist-driven economies such as Barbados, Aruba, Belize, Cape Verde, Montenegro, and Albania.”

It was the same when it came to external indebtedness, with S&P projecting that this - as a percentage of current account receipts - could increase by 33.36 percent in 2020, and 16.06 percent in 2021. “External indebtedness deteriorates most dramatically in The Bahamas, Montenegro, and Greece, which each experience a worsening of around 30 percent of current account receipts in the ‘extreme’ scenario,” S&P added.

“Our analysis suggests that small ‘sun, sea and sand’ island destinations would be the worst affected from a slowdown in global tourism flows. In relative terms, Aruba, The Bahamas, Barbados, Cape Verde and Fiji would likely experience the most significant deteriorations in credit metrics. Other Caribbean sovereigns would also be moderately affected, but to a lesser degree.”

The S&P report findings further support The Bahamas’ need for further economic diversification, which has been glaringly exposed by the COVID-19 pandemic, as well as its vulnerability to external shocks and over-reliance on tourism.

The projections were revealed just as the Prime Minister yesterday received push back from the Bahamas Chamber of Commerce and Employers Confederation (BCCEC) and the wider private sector for blasting business over an alleged lack of compassion and “soul” in temporarily laying-off thousands of workers to cushion COVID-19’s financial blow.

Dr Hubert Minnis, in departing from the prepared script for his televised national address, initially said: “I appeal to business owners who can afford to do so to hold-off laying off employees for as long as possible. Such generosity of spirit will make a tremendous difference at this time.”

Within minutes, though, his tone had hardened as he added: “I am extremely disappointed to see Bahamian companies laying-off individuals who have worked with them for 10, 20 years....” He implied that many business owners had earned their wealth, and been able to afford their high-end homes and to send their children to university, thanks to the efforts of loyal staff that they were only now to eager to discard and lay-off amid the COVID-19 pressures.

“Where is your heart? Where is your compassion? Where is your soul? Let’s be humane,” Dr Minnis urged. “Let’s consider that these individuals made great sacrifices to get you where you are today..... But as soon as things get tough you take action and lay-off Bahamians. I ask you: Where is your heart, or do you have a heart?”

The Prime Minister’s comments are understood to have blindsided the private sector, with the Chamber describing itself as “disappointed” by the remarks. Khrystle Rutherford-Ferguson, its chairman, said in a signed statement that the temporary lay-off were often necessary to ensure a company can survive and provide employment once the pandemic ends.

“The Bahamas cannot rebound and have a robust economic environment post COVID-19 unless businesses survive this health and economic crisis,” she said. “Every day the business community is having to make difficult decisions that have impacted some of its employees after not having the ability to generate revenues for over four weeks.

“Many business owners, small, medium and large, are trying to find ways to keep their staff employed as long as possible, including dipping into their own pockets to meet the need. The BCCEC commends our members for these efforts.”

Mrs Rutherford-Ferguson added: “What must be remembered is that these lay-offs are temporary and it is the intent of the employers to re-engage these employees in the future.

“None of these decisions have come easily. However, the decision was made with a view of protecting the future of the economy and businesses. Only the businesses that survive this crisis will be able to stimulate the economy by providing future jobs for Bahamians..... Some of these business owners will lose their life’s work and savings, as a result.”

Mrs Rutherford-Ferguson said there was still “no clear indication on when and how the economy will reopen”. Tribune Business understands that the Chamber will meet the Prime Minister this morning when his remarks are likely to be one topic of discussion. One source described the issue as a “minefield”, which had undone all the confidence created earlier in Dr Minnis’ speech when he announced the opening up of certain industries and Family Island construction.

The fear is that the Prime Minister may have alienated the very private sector he needs to revive and re-open the Bahamian economy while undermining its confidence. Several sources, speaking on condition of anonymity, suggested his remarks sounded like “a campaign speech” and designed to make the private sector a scapegoat in the public’s eyes. Others argued that it betrayed a lack of understanding of how businesses operated, given that payroll is often their largest expense and they have not earned any revenue for four weeks.

Meanwhile, Dr Minnis confirmed that the Government will have to undertake some foreign currency borrowings as part of plans to bolster the economy and its own finances, with foreign currency reserves now projected to decline by around $1bn in 2020 - as opposed to earlier projections of $900m - as a result of the global tourism shutdown.

“The Bahamas entered the COVID-19 pandemic with adequate foreign reserves to cover essential imports, and to preserve the parity of the Bahamian dollar against the US currency,” Dr Minnis said. “The Central Bank is working closely with the Ministry of Finance to ensure that fiscal stabilisation policies are balanced with adequate additional access to foreign currency, through the borrowings which the Government must undertake.”

He added: “Alongside the financing that can be obtained locally, the Government will have to rely on some foreign currency borrowing to cover its revenue shortfall. Taking this active financing strategy into account, along with other foreign exchange market strategies that the Central Bank is pursuing, it is expected that the drawdown in the foreign reserves will reach about $1 billion in 2020.

“This, from a present healthy level of approximately $2bn. The Central Bank expects that after 2020, net inflows of foreign currency through the private sector will begin to improve. This will permit a very gradual recovery in external reserves, provided the deficit financing strategy maintains a prudent balance between Bahamian dollar and foreign currency borrowing.”

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