By NEIL HARTNELL
Tribune Business Editor
The Central Bank yesterday said it had “sold well over $100m” of its government debt holdings to prevent surplus bank liquidity from fuelling an “excessive” consumer credit boom.
John Rolle, its governor, confirmed that regularly “scheduled” secondary market sales of these debt securities would continue during 2019 as a way to “satisfy” investor demand in addition to mopping up $1.5bn-plus in excess commercial bank liquidity.
Speaking at the Central Bank’s first-ever quarterly press conference on the economy, Mr Rolle said the listing and trading of government debt securities via the Bahamas International Securities Exchange (BISX) would “definitely” be completed by mid-year 2019.
While all parties had initially targeted November/December 2018 for the government debt market’s transfer from the Central Bank to BISX, Mr Rolle said they were still “fine tuning” the system to ensure it operates smoothly for the benefit of all market participants.
The Central Bank has long identified the build-up in commercial banking system liquidity, aided by the government’s use of part of the proceeds from its $750m foreign currency borrowing in late 2017 to pay down Bahamian dollar debt, as a potential medium-term risk if it ends up financing an unsustainable expansion in consumer borrowing.
This surplus liquidity, which represents assets available for lending, has remained at elevated levels for several years because the banks can find no suitably qualified borrowers, although it declined by $265.52m - some 14.8 percent - during 2018 to close the year at $1.533bn.
However, the Central Bank’s monthly economic report for December 2018, released yesterday, confirmed that these excess assets could pose a “medium-term” threat to the external reserves that support the Bahamian dollar’s one:one peg with its US counterpart unless action was taken to reduce them in a gradual manner and lessen the risk of a credit boom.
“The elevated liquidity levels in the local banking system could place negative pressures on external reserves over the medium-term if deployed to fuel excessive consumer credit demand,” the Central Bank report confirmed.
It is for that very reason, and also to reduce the Government’s reliance on the Central Bank to purchase its debt, that the Central Bank has begun to lower its holdings of government securities by selling them to institutional investors and others on the secondary market.
This is where the buying and selling of securities takes place after their initial issuance, and sales to the banks - which will see them exchange cash for government debt - will help to mop-up this excess liquidity in a controlled manner.
“I know that we’ve sold well over $100m in debt off the Central Bank’s balance sheet in the secondary market, and that programme will continue in 2019,” Mr Rolle said. “Even with these sales we see the seasonal fluctuation in the system.
“Generally speaking, we see there is the investor demand for more of the government debt that exists. This is a way to satisfy that some of that demand. We’ve been regularly scheduling securities market sales, and I think we have one of these issues scheduled for this month, February. On a regular basis we will be making available the bank’s holdings for investors to purchase.”
Some 47.7 percent, or $126.71m, of 2018’s $265.52m decline in surplus commercial bank liquidity occurred during December. Mr Rolle explained that this resulted from “at least one public entity’s swapping of foreign currency debt into local currency”, which “caused a larger seasonal decline in bank liquidity during the final month of the year and, similarly, for the year”.
The Central Bank governor, meanwhile, said the government debt market’s transition from the regulator’s operational/administrative oversight to listing on BISX was “progressing very well”.
“We had an initial target of getting it fully set-up by November/December last year,” Mr Rolle said of the transfer. “At this stage there’s some fine tuning behind the scenes to make the system work smoothly. It’s strictly a technical [issue] of making sure the system interfaces and functions smoothly.”
Asked when the BISX switch would be completed, the Central Bank governor replied: “I would say definitely before the end of the first half this year. I would like to say the end of the first quarter, but am giving it before the end of six months.”
Keith Davies, BISX’s chief executive, last week told Tribune Business that the exchange was “in the final stages” of preparing to list and trade billions in government debt - a move he hailed as “a watershed”.
He added that the anticipated listing of 100 separate Bahamas Government Registered Stock (BGRS) and Bahamas Government Stock (BGS) debt tranches represented a “game changer” for the exchange after a near two-decade wait for this to happen.
The Central Bank, in unveiling the new structure aimed at creating “a more efficient and vibrant” market for Government debt securities last November, said it was intended to “promote more efficient market trading and better pricing of the bonds through market bidding”. It was due to create the Bahamas Government Securities Depository (BGSD), which is to act as the “registrar and transfer agent” for government debt, by November 26 last year.
Mr Davies, for his part, said of the benefits: “You have information, transparency in terms of what’s happening in the market and, more importantly, have a place where buyers and sellers can go to list and trade securities.
“You don’t have to guess what’s available. It will be presented in a very transparent fashion, and all persons will have an element of price discovery that didn’t exist before the listing on BISX, and which is vital to the development of the marketplace.”