PLP's $250m Mortgage Plan Blasted
By NEIL HARTNELL
Tribune Business Editor
Nassau, The Bahamas
A LEADING Wall Street credit rating agency has blasted the newly-elected Progressive Liberal Party (PLP) government's proposed mortgage relief plan for "undermining" efforts to rein in the $4.356 billion national debt, warning that the scheme will likely cost Bahamian taxpayers $250 million to implement.
In a commentary likely to shock many in the governing party, Moody's described the plan - a key plank of the PLP's general election campaign - as demonstrating "a lack of commitment" on the Christie administration's part to tackle annual fiscal deficits running at over 4 per cent of gross domestic product (GDP).
Moody's described the proposed mortgage relief plan as "a credit negative", implying that its implementation could lead to it further cutting (downgrading) this nation's sovereign credit rating, something that could scare away foreign investors and increase the Bahamas' borrowing/debt servicing costs in the international capital markets.
Edward Al-Hussainy, Moody's assistant vice-president, in his note to investors on the general election outcome's implications, also warned that the PLP's mortgage plans created "moral hazard" that could increase Bahamian mortgage delinquencies, and would cost the Government a sum equivalent to 3.1 per cent of GDP spread over five years.
Mr Al-Hussainy, in his investment note obtained by Tribune Business, said of the new government's proposal: "We believe this demonstrates the new government's lack of commitment to the fiscal consolidation measures necessary to stabilise the national debt, and is credit negative.
"When enacted, this legislation will constitute a substantial contingent fiscal liability to the Government, and will negatively affect the sovereign credit. We estimate the contingent cost to the Government will be up to $250 million over five years, or 3.1 per cent of 2011's GDP.
"In addition, the plan introduces an element of moral hazard into the housing finance market that may actually increase delinquencies from their current level of 20 per cent of mortgage stock, or over 9 per cent of total bank lending."
Bahamian commercial banks, which have been waiting in trepidation to hear from the Government on how it proposes to implement its mortgage relief plan, last night told Tribune Business that the "moral hazard" element had already begun to kick-in.
While no bankers want to speak 'on the record' for fear of upsetting the new government, one senior executive, speaking on condition of anonymity, told this newspaper: "Banks are already seeing a deterioration in arrears for mortgages under 90 days past due.
"Those under 90 days past due have increased since the PLP announced its scheme. We were alarmed at the trends. The asset recovery teams were saying there was a sizeable jump in mortgage arrears between 31-90 days."
Moody's sentiments are likely to place Prime Minister Perry Christie and his government between the proverbial 'rock and a hard place', and at least give them pause for thought and pull them up sharply on the plan.
One the one hand, Mr Christie and the PLP will want to deliver on a key election promise that may well have induced a significant number of Bahamians to vote for them, and will not want to disappoint them for fear of a voter backlash.
Indeed, implementing the mortgage relief plan is included among the achievements the PLP has promised to fulfill during its first 100 days in government. And, as the bankers have indicated, there are already signs that more Bahamians are defaulting on their mortgage payments in the expectation that the Government will be there to bail them out.
Yet, on the other hand, the Government cannot risk a possible further downgrade to its sovereign credit rating. Not only would this increase borrowing/debt servicing costs on existing and future foreign currency debt servicing issues, such a development would also send a negative signals to international capital markets and potential foreign investors.
With economic growth and recovery a top priority, the last thing the Bahamas needs to do is send the wrong message that deters foreign direct investment (FDI).
Yet Moody's statement has already dealt a significant blow to the new government's hopes of sending out a message of 'fiscal prudence'.
Mr Al-Hussainy, in his note, said: "The Bahamas is experiencing a weak recovery from the global financial crisis, remains vulnerable to external shocks, and has limited fiscal room to maneuver.
"Our negative outlook for the sovereign reflects a growing financial deficit, currently at 4.7 per cent of GDP, and high levels of government debt that have ballooned to 53 per cent of GDP from 31 per cent at the time of the last national election in 2007.
"Stimulus spending has supported a return to positive, albeit tepid, growth of around 2.5 per cent this year. But unemployment remains above 15 per cent."
And, dealing a potentially serious blow to the Government's mortgage relief plan, Mr Al-Hussainy added: "Also, there's been little progress in reforming the tax system and diversifying sources of tax revenue, in particular through the introduction of a value-added tax (VAT).
"Near-term fiscal consolidation to control public spending and build up buffers is critical in this economic environment, and the mortgage plan undermines this."
The Moody's investment note said the PLP's general election campaign had advocated "significant new social spending", and described the mortgage relief plan as Mr Christie's "central campaign pledge". The rating agency said the plan included five years' of government guarantees for delinquent borrowers, together with write-offs of accrued interest and fees owing to the banks, and interest rate caps on mortgage loans.
Mr Al-Hussainy produced data showing that there were some $3.2 billion worth of outstanding mortgage loans in the Bahamian banking system, a sum equivalent to 39.6 per cent of GDP. Residential mortgages accounted for $3 billion, a sum equivalent to 37.3 per cent of GDP, with banks holding $2.8 billion - equivalent to 34.9 per cent of GDP.
The $700 million worth of mortgages in arrears is equivalent to 8 per cent of the Bahamas' $8.2 billion GDP, Mr Al-Hussainy noted. He calculated the $250 million burden from the proposed relief plan using an interest rate of 8.2 per cent, and 20 per cent of residential mortgages being in arrears.
The Moody's data also showed how many Bahamians were mortgaged to the hilt on consumer loans. With total bank lending standing at $7.1 billion or 87 per cent of Bahamian GDP, consumer credit totalled $5.2 billion or 63.6 per cent of GDP.
May 16, 2012