Moody’s, an international credit ratings company recently downgraded The Bahamas’ economic outlook from Stable to negative!
In light of this, I believe a key question that every party vying to be the next government of The Bahams must answer is;
How will you Reduce our National Debt and Debt-to-GDP ratio
If you know me or have been reading this blog, you know that I believed that the single greatest threat to our way of life was crime. However I am so alarmed by what I’m learning as a result of this Moody’s downgrade that I have revised that belief.
The truth is we as average Bahamians are not great with finance on a personal level, much less on a national level. The same could be said about the average American prior to 2007 and maybe still today.
As a result many lost their homes, life savings, jobs and now find that they are poor with little prospect of improving in the near future.
So I believe we can no longer ignore these matters, or trust that our government will get it right. We have to take a conscious interest in whats happening in our country and ask some pointed questions.
Summary of our Current Financial Situation
With that said, let me give you a brief overview where we’re at as a Nation;
- Our National Debt is 4.2 billion dollars
- Our Current Debt-to-GDP is 65%
- Moody’s recently Downgraded their outlook of our economy from Stable to Negative
- According to Moody’s- The Bahamas’ economy has grown a cumulative total of just a little over 6% over the past ten years — it is unlikely that it will be able to grow out of its debt burden
- IMF report says that our debt-to-GDP will reach 79% in 4 years if no action is taken
- The same report says that if Government reduce recurrent spending by 2-3% GDP our debt to gdp will stabilize at 60%
- 1% of GDP is roughly worth between 70-80million dollars, So we’re looking at a 140 – 240 million reduction
- Government recurrent spending is on Salaries and Rent
Now that I’ve set the stage, I hope you can see the predicament that we’re in but incase you can’t let me bring it down to a personal level.
Have you ever been to a Bank for a loan?
They usually ask you a bunch of questions about your debt (loans rent mortgate etc) and your earnings (salary) they also require a job letter from your employer that tells them if your prospects of future employment is good.
What they are doing is determining what they call your Debt Service Ratio (DSR). Any time you go for a loan, or mortgage, this is what they use to determine if they will loan you money.
Your DSR tells them how likely you are to default on your payments if they lend you money. For most local Banks the DSR boundary is set at 35% i.e. if your debt to income level is higher than 35% they will not lend you money because there is a high risk that you will not be able to repay.
In simpler terms if your income is 1000 per month, but you pay out 500 per month in fixed cost (rent, mortgage) your DSR is 50% and they will not lend you money. We can equate DSR to Debt-to-GDP.
So, according to the IMF, If nothing is done to prevent it, our Debt-to-GDP will reach a staggering 79%. Which means that we will find it increasingly difficult to burrow money from international money lenders.
And when they do lend us money it will be at a much higher interest rate. Which in turn will push us further into debt. Because as anyone with a mortgage knows, it’s the interest that really kills you.
How will this affect YOU, the average Bahamian?
Well, if the government goes further into debt they will have to collect money to service that debt. Which means more taxes. More taxes means a higher cost of living and doing business in the Bahamas.
As a result more people will lose their jobs, more businesses will close, and crime will continue to increase.
Can you imagine? Cost of Living Higher than it is now! Crime Higher than it is now! Wow, that’s a scary thought.
So the dilemma that our next government must tackle and any party that wants to be the next Government must have a plan for, is How will they reduce our Debt-to-GDP ratio?
Long-term and Short-term Solutions
Long Term (+15years) we can try to do what we should have been doing over the last 30 years; diversify our economy. Which could spur economic growth and increase our GDP..(our short-sited, single-minded infatuation with tourism is now biting us in the backside)
Short Term we have to Cut Cost, plain and simple. Which equates to reducing Government Salaries.
(Perhaps this is why the FNM government was hell-bent on selling BTC? But if that’s the case why burrow more to do road works? anyway this article is not about that)
I’m talking about salaries of all government agencies; BEC, Water&Sewage, Bahamas Air, Police, Teachers, Nurses, NIB, Customs , Immigration, all the ministries… some hard choices have to be made.
This is what the next administration of the Bahamas will be challenged with. So if they’re out there promising us the world, they either lying to us or they are irresponsible and can’t be trusted to govern.
If they don’t have a plan, we will slide into poverty and considering the crime level now when we are still a relatively rich nation, you can see how easily we can become another Jamaica or Haiti… it’s not impossible.
I’m not an economist, but this is how I read the situation. I think we’re in serious trouble here people
Am I over reacting? What do you think about our financial situation?