By NEIL HARTNELL
Tribune Business Editor
The Bahamas' "vulnerability" to global market changes has increased as a result of foreign currency borrowings accounting for more than one-third of government debt, Moody's is warning.
The international credit rating agency, in its annual in-depth analysis of the country's economic and fiscal position, revealed that the Government's $750m foreign currency bond late last year had increased the foreign currency component of its debt by almost ten percentage points.
"External debt as a share of total government debt remains low at 36.8 percent in fiscal 2017-2018, up from 26.9 percent in fiscal 2016-2017," Moody's said. "The share of external debt increased following the issuance of a ten-year, $750m international bond with a coupon of six percent in November 2017.
"Although the external financing environment has been favourable, increased reliance on external market funding has increased The Bahamas' vulnerability to a change in global market conditions in the medium term."
Increased foreign currency borrowing potentially raises pressure on the Bahamas' external reserves, as this nation then has to earn US dollars through tourism and foreign direct investment (FDI) inflows to ultimately repay interest and principal on the debt.
Successive governments, with advice from the Central Bank, have traditionally sought to keep foreign currency debt at minimal levels to avoid fiscal policy creating pressure in the monetary arena. However, its share of the Bahamas' total debt increased under the former Christie administration and now the latest government's $750m bond.
Still, Moody's emphasised that there was no cause for alarm yet. It added that the Bahamas' favourable debt maturity profile, with principal repayments spread out over largely the next 20 years, and the 'captive' domestic investor base meant there was no real worry over the near-$8 billion national debt.
"Vulnerability to refinancing risks are mitigated by the currency peg as well as the external debt's long maturity profile: the first upcoming Eurobond repayment, amounting to $300 million, is not due until 2024," Moody's said. "Additionally, the government has established a sinking fund to cover the principal payments due on the 2028 bond that amortizes in 2026-2028.
"The Bahamas has a favourable debt maturity profile with only around 10 percent of government debt comprised of short-term debt. External market debt has an average maturity of 11 years, while domestic bonds mature on average in nine years."
Moody's though, did note the increased borrowing and debt burden imposed on the Government and Bahamian taxpayers in recent years by fiscal deficits that have consistently exceeded $300m.
"Gross borrowing requirements as a percentage of GDP have increased to an estimated 9 percent in fiscal 2017-2018, thereby exceeding historical trend levels of about 6-7 percent of GDP, as a result of an increased fiscal deficit and redemption of promissory notes related to the Bank of the Bahamas' bad debt," the rating agency added.
"We expect the government's financing needs to remain elevated at 8.4% of GDP in fiscal 2018-2019 as the government continues clearing its outstanding arrears."
Moody's also identified the increased debt burden of state-owned enterprises (SOEs), such as Bahamas Power & Light (BPL) and Bahamasair, as a "potential growing risk" to efforts to eliminate the fiscal deficit and ultimately slash the national debt.
"A potential rising risk to the Government's fiscal strength is the increase in the debt burden of SOEs, which reached 13 percent of GDP as of March 2018, as this is not included in our debt ratios," the rating agency added.
"Although less than half of it is fully guaranteed by the central government, should these contingent liabilities materialise it would have a material effect on the government's balance sheet.
"Potential reforms to SOEs would be key to ensure that their finances improve both to reduce the necessity of sovereign support and to decrease transfers the central government makes every year - in 2017-2018 these transfers amounted to $429 million (3.5 percent of GDP) - that impact its own fiscal deficit."
Still, Moody's ended its assessment on a positive note, saying: "Despite its relatively high debt ratio, The Bahamas' debt structure remains favourable and mitigates some of the risks inherent to a sizable debt burden. Although the government's external debt has increased in recent years, debt remains predominantly denominated in local currency and held domestically.
"Owing partly to the existing capital controls, the government has a captive domestic investor base in the form of local banks and the National Insurance Board. This investor base has helped the government extend its maturity profile to close to 10 years."