The Moody’s Downgrade: Has the Government Gotten the Message?
Moody’s Investors Service is one of the three major international credit rating agencies; the others being Standard and Poor’s and Fitch Ratings. These rating agencies perform financial and economic research on governments and large businesses. They derive their ratings using a standardized rating scale that allows comparisons across countries and businesses.
The rating agencies are required to be unbiased and dispassionate in their analysis and reporting. Investors and lenders; who subscribe to and pay for the services of these rating agencies, rely on the independence of the ratings when making decisions on whether to invest in, or lend money to a business or country; and on what terms these investments or loans are to be made. It is therefore in the commercial interest of these ratings agencies to be completely neutral in their work and reporting.
These ratings reports give us in The Bahamas an opportunity to see our economy and our prospects through the eyes of independent outsiders with no particular prejudices.
On August 31, 2011 Moody’s Investors Service, announced in a press release that it was affirming the Government of The Bahamas’ A3 bond rating but that it was downgrading the outlook for the Bahamian economy from stable to negative.
Most of the attention of observers has been focused on the downgrade of the outlook from stable to negative and rightly so because it give us an idea of what lies ahead if we do not address the issues at hand.
The reasons given by Moody’s for the revision of the economic outlook from stable to negative were, for emphasis, clearly stated in point form at the beginning of the release as:
The significant run up in government debt levels in recent years
The country’s limited growth prospects
The challenges that the government is likely to face in raising revenues
In the body of the release, Moody’s goes on to detail some other areas that should cause real concern for policymakers and citizens alike.
What might startle most Bahamians is the revelation by Moody’s that the level of the national debt has increased by forty per cent (40%) in the past two years alone.
Moody’s further reveals that the economy of the Bahamas has grown a total of only six per cent over the past ten years; the growth in the early years of this decade having been wiped out by the shrinkage of the economy over the past four years.
When we factor in the increase in the cost of living; the reality is that our economy has shrunk and the standard of living has fallen. In effect, we have gone backward economically.
Moody’s opines that the limited growth prospects of the Bahamian economy means that we will be severely challenged to simply grow out of this quagmire. As a result, there is little prospect that the revenue that the government needs to pay the interest on this debt will show any significant growth.
We are challenged therefore; to address the persistent, large budget deficits in order to have surplus funds that that can go toward paying down some of our national debt.
Moody’s concludes: “A failure to by the government to reverse the recent trend of rising debt would likely result in a downgrade of the Bahamas rating. In order for the outlook to return to stable, the government would need to demonstrate a credible plan not just for stabilizing debt, but for reducing it to a level more consistent with the current A3 rating.”
There is therefore no consolation in the fact that the credit rating is unchanged. Without a credible plan to address the ballooning national debt, a downgrade of the credit rating is sure to come.
In summary, the release by Moody’s forces us to recognize that the level of the government debt has grown to levels that are simply unsustainable. While we presently have the ability to make the payments, the steady increase in the amount of funds required to make these debt payments means that there will be a steady decrease in funds available to provide other government services. The more money we are required to pay to support the national debt, the less money will be available for national security, health, education and other essential services.
In its response, the government gave its standard and now familiar recitation:
“The recent global economic and financial crisis profoundly impacted the Bahamian economy and required extraordinary levels of spending on the part of the government to safeguard the financial system, boost economic activity and provide assistance to Bahamians badly in need of help in these trying times when government revenue experienced precipitous declines.”
Well written sure, and it sounds good; but does it hold water. What money did the government spend to safeguard the financial system? What programmes were involved? We know that the government borrowed money in US dollars to increase the level of foreign reserves but this claim of spending money to safeguard the financial system is a mystery.
We also know that the unemployment benefits programme is being funded by the National Insurance Board, through a payroll levy and therefore did not involve money coming directly out of the Consolidated Fund.
Additionally, information in the public domain suggests that the amount of money borrowed directly by or guaranteed by the government to fund infrastructure projects combined for a total of approximately $350-$400 million. This is what is presumably meant by spending aimed at “boosting economic activity”.
Yet the Central Bank of the Bahamas shows government debt rising from $ 2.887 billion at the end of 2006 to $4.268billion at the end of 2010; an increase of $1.381billion.
What this is telling us and what the government appears to be reluctant to tell us directly is that we have actually been borrowing money to pay recurrent expenses. We have been borrowing money to pay salaries, rents and interest on the national debt. The situation where a nation has to actually borrow money to pay the interest on the national debt, which in economic terms is called running a primary deficit and is very concerning to agencies like the ratings agencies and the International Monetary Fund (IMF).
To appreciate the seriousness of this situation; imagine an individual having to go to one bank to borrow money to pay the interest on a loan at another bank! This is clearly unsustainable and very dangerous.
In addressing Moody’s comments on the high debt levels the government said:
“Despite this, we maintain in the circumstances a debt to GDP ratio that is one of the lowest in the region.”
Another one of its standard responses; which is totally inadequate. When we look at the region, we have Jamaica which is in the middle of an IMF restructuring programme and Barbados; which has gone through two IMF restructuring programmes and may be looking at another. Guyana, a Highly Indebted Poor Country (HIPC) and the Organization of Eastern Caribbean States; all are in various stages of negotiation with the IMF on structural adjustment programmes. The only exception in the region is Trinidad and Tobago with its abundant reserves of natural gas.
So the boast that we are better of than our regional neighbours is no comfort at all.
We should really be comparing ourselves to countries with similar ratings. In fact Moody’s plainly says as much when they say:
“As a result the Bahamas’ debt levels which were at the median for its rating range until 2006, are now nearly 40% higher than the median. Its relatively high wealth levels – the Bahamas’ GDP/capita is nearly twice the median for the rating range- enable the Bahamas to support a somewhat higher level of debt at a given rating level to other countries, but not 40% higher”
Simply put, when compared with our ratings peers, our debt levels are just too high.
So, has the government gotten the message that things must change? From its responses, apparently not.
What must be done?
Firstly we must admit we have a problem and stop pretending that everything will work itself out as soon as the United States economy turns around.
Secondly we must get a handle on spending. The government spends over a billion and a half dollars every year. Whose job is it to ensure that we, the Bahamian public, get value for the money spent?
If we can save ten per cent of this amount through improved procurement processes and quality control, that would translate into one hundred and sixty million dollars saved.
The Department of Statistics in its latest employment survey pointed to a substantial increase in the number of discouraged workers and workers migrating to the informal sector. The Central Bank in its Monthly Economic and Financial Indicators for July 2011 pointed to “considerable slack” remaining in the job market.
Bottom line, fewer Bahamians are working. So we must stimulate the creating of good, permanent jobs. One way to do this would be for the Government of the Bahamas to commit to building five new, state of the art schools across the country; fully equipped with the latest technology. Other schools would be renovated to bring them up to the new standard. Of course the work would be done by locals.
The objective should be to promote standards of excellence in academic and vocational training.
Immediately, hundreds of Bahamians would be put to work. In addition, we begin to better prepare our students for success in the twenty first century workforce. A Private Public Sector Partnership can be explored to address the issue of cost. Such a partnership of private and public sector would ensure that employers have some input into educating and training the future workforce.
Going forward we must be serious about financial management particularly when it come to deficits and debt management. How serious are we? Not too serious I’m afraid.
Earlier this year the government amended the Financial Administration and Audit Act to, among other things, require governments, when a budget deficit is forecast in any particular year, to provide Parliament with a plan on how that deficit will be eliminated.
A positive step indeed; except that just before breaking for the summer, the government brought another amendment whereby the coming into force of that particular provision can be delayed indefinitely. So the whole purpose of the initial amendment is defeated and the way is clear to continue with business as usual.
We dodged a bullet this past budget period. Had it not been for the sale of the oil facility in Grand Bahama that netted $114 million windfall in stamp taxes to the Public Treasury and the sale of BTC that netted a reported $210 million, we would have been looking at a one year budget deficit of over $500 million. While the sale of BTC helped to plug a hole this year, the sale of this public asset is equivalent to selling a piece of property to pay the rent.
This budget period, there is no BTC to sell and we may not be so lucky in having such a huge stamp tax windfall.
In conclusion, there is no magic formula to cure our debt woes. Many of our problems are structural and have become entrenched over many years. To work our way back to economic and financial health will take hard work and sacrifice. The first step however is to admit that we do have a very serious problem. We should use this warning from Moody’s as an opportunity to build a national consensus and begin the reform process. To do nothing is not an option.