The Tribune

The Government recently borrowed $300 million in the form of a US dollar bond issue. The minister of state for finance, Michael Halkitis, announced that the bond issue was oversubscribed and that institutional investors were willing to lend Government up to $6 billion. He further stated that the Government was pleased, and somewhat surprised, by the relatively low coupon rate (rate of interest that has to be paid on the bond) of 5.75 per cent instead of the expected 6.5 per cent rate. Mr Halkitis implied that this demonstrated the faith that investors have in the creditworthiness of the Bahamian government.

To a large extent, the current creditworthiness of the Government, in the eyes of the institutional investors, is based on the fact that the Bahamas has never defaulted on any of its previous debt obligations, rather than any faith in the fiscal prudence of the Government. However, at the time of the issuance of this bond, the rate of interest paid on junk bonds of a similar maturity (10 years) in the US was 5.67 per cent.

An investor will often buy a bond if the coupon rate is high enough to compensate for the degree of risk associated with buying the bond. Apparently, the institutional investors who purchased these bonds have some knowledge of the Government’s less than robust financial position. In short, the Government just issued $300 million of sovereign junk bonds or, put another way, the Bahamas’ external debt was implicitly downgraded by institutional investors to junk bond status.

Recent reports have revealed that many Bahamian MPs owe millions of dollars in outstanding real property taxes, utility bills, and have consistently broken the law by not filing their annual disclosures as is required by the Public Disclosures Act. Furthermore, no action has been taken by either the Prime Minister or the Attorney General to rectify the matter. These actions/inactions of our policymakers have not only undermined the integrity of government, but violate the Constitution of the Bahamas, which clearly states that any MP who has broken the law must step down and is prohibited from participating in any future elections.

This exposure of the lack of institutional integrity of government will have a detrimental impact on the Bahamas’ domestic sovereign debt rating. Traditionally, all of the credit rating agencies, Moody’s and S&P, have given the Bahamas high marks for institutional integrity. Indeed, this is one of the reasons for the Bahamas being able to maintain an investment grade sovereign debt credit rating. According to Moody’s: “Institutional strength evaluates whether the country ‘s institutional features are conducive to supporting a country ‘s willingness and ability to support its debt. A related aspect of institutional strength is the capacity of the Government to conduct sound economic policies that foster economic growth and prosperity.”

Moody’s high assessment of the Bahamas’ institutional strength is based on the country’s favourable scores on the World Bank’s governance score, which takes into account government effectiveness, rule of law and control of corruption, and other dimensions of institutional quality.

Given that Institutional integrity is determined by the collective integrity of the individuals who work in/for the institutions, both Moody’s and S&P will have ample justification to reassess their rating of the Bahamas’ institutional integrity status. If there is a further downgrade of our domestic debt to junk bond status, then this would place the Bahamas on a path towards a sovereign debt crisis and an extremely unpleasant cascade of subsequent events.

The commercial banks, pension funds and NIB purchase the majority of the bonds issued by Government. However, if the bonds are downgraded to junk status then these entities would no longer be able purchase them. The Government would be faced with three options: 1) Forced to borrow more money externally, which would be difficult, expensive or impossible. 2) Default on its debt obligations or make existing bondholders take a haircut. 3) Attempt to sell any existing assets. There would also be a corresponding banking crisis, a profound slow down in economic output and massive social and political unrest.

In summary, the ultimate fate of the Bahamian economy now hinges to a large extent on the integrity of 38 elected public officials. Let’s all hope that they can find it, because in this case an ounce of integrity is equal to a pound of credit.