Governor: US rate hikes could ‘frustrate’ fiscal consolidation


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The Central Bank Governor warned yesterday that interest rate hikes in the United States could “thwart” the government’s fiscal consolidation plans by increasing its foreign currency borrowing costs.

John Rolle, speaking as the Central Bank unveiled its assessment of economic developments in the fourth quarter and the year 2021, warned that the US Federal Reserve’s efforts to fight inflation could have consequences on the Bahamas’ efforts to refinance existing foreign currency debt as well as new borrowings. .

The US central bank is expected to raise interest rates up to four times in 2022, raising borrowing costs by 25 basis points or 0.25% each time. The Central Bank Governor yesterday described this as one of the ‘downside risks’ facing the Bahamian economy this year, as it could also negatively impact vacation demand from Bahamian travelers. .

“While pent-up vacation demand remains an important part of the tourism recovery, the U.S. central bank’s response to raising interest rates to fight inflation could erode some of that momentum,” Ms. Rolle.

“It could also frustrate The Bahamas’ fiscal consolidation efforts by increasing the costs of new or refinanced foreign currency debt. That said, there remains an opportunity for further reforms to strengthen The Bahamas’ sovereign risk assessments and s tackle existing interest differentials on foreign currency debt.

According to the government’s just-released medium-term debt management strategy, the Bahamas has foreign currency debt worth approximately $309.5 million maturing for principal repayment in 2022. , and which may need to be refinanced and renewed. Another $293.4 million matures in 2023, and that figure is expected to peak at $514.4 million in 2024.

This means that more than $1 billion in foreign currency debt will potentially need to be refinanced at higher borrowing costs over the next three years if US interest rates are raised. And that will only add to the debt service burden on taxpayers which is expected to increase further over the next five years, from $482.5 million in 2021-22 to $567.6 million in 2025-26. .

Mr Rolle, however, said the Bahamas also had “an opportunity to reduce” the decline in its sovereign creditworthiness – resulting from multiple downgrades by Moody’s and Standard & Poor’s (S&P) – by reversing the post-Dorian and COVID fiscal slippage. , and regain the confidence of its lenders and creditors.

“The Bahamas and emerging countries as a whole, which are borrowing in US dollars through US credit markets, as US interest rates will trickle down and put pressure on the cost of borrowing in US dollars” , said the Central The governor of the bank explained.

“This could impact the cost of borrowing for The Bahamas, as it increases the costs of new financing and the need to refinance any debt. The Bahamas is also in a position over the next few years where we have the opportunity to reduce our sovereign credit rating.

This rating is at junk, or non-investment grade, status with both Moody’s and S&P, and will take some time to improve. However, Rolle said efforts in this area are “one of the most important elements” of any government debt management strategy and efforts to reduce the costs associated with Bahamian US dollar borrowing.

Turning to the government’s fiscal strategy report just released, he added: “The most important thing the government articulates in its fiscal strategy, besides forecasting where it expects to be, these are the tools and strategies he plans to use to achieve this result for the Bahamas.

Apart from reducing the annual budget deficit and the debt burden, Rolle said the government must “take active steps to save more on its revenue collection and to improve its revenue collection efforts”.

He added: “These kinds of messages come out of the budget strategy report, and these are important messages for the government to send. There will be debate and discussion on the level of effort channeled through these measures.

“First, we need to identify the positive intention that yields more positive results for the debt and deficit burden. These results in the Bahamas depend on additional measures beyond the growth of the economy, because we have a stock of debt, the level of which we are trying to reduce in the medium and long term, and this is where the improvement revenue and reducing expenses become very important.”

Mr. Rolle acknowledged that domestic inflation, as much as what is happening in the United States, will also impact the Bahamian economy in 2022. He said: “Rising inflation which, although that not being an outsized concern, could increase the import bill and consume a larger share. foreign exchange earnings.

“Similarly, COVID-19 remains an uncertainty, both in terms of unequal access to vaccines internationally and domestic factors that also weigh on the travel industry’s assessment of the safety of vacationing in the Bahamas.

“Where appropriate, the Central Bank remains well positioned to respond to the strengthening foreign reserve adequacy and support for the fixed Bahamian dollar exchange rate…The Central Bank also expects the environment is less dependent on public funding in foreign currencies, while private sector inflows continue to strengthen.

Mr Rolle said the economy would enjoy a full year of uninterrupted reopening in 2022, adding: “In summary, the outlook is for stronger growth in 2022 as the calendar year impact of reopening of the economy is confirmed. Reconstruction elements are also expected to maintain above-average growth in 2023, although less accelerated than in 2022.”

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