AS well thinking individuals, we are routing for the success of the country. Unfortunately, often, commentary is misconstrued and misunderstood as being otherwise. Regardless it is fundamental that public discourse remains factual, balanced and unimpeachably honest. While some would wish to conclude differently, the future of national debt in The Bahamas rests squarely on the continued positive cadence of the fiscal consolidation, policy adjustments that will become necessary, consistency between what is captured in the Debt Management Strategy and actions of the administration and the strategic decisions emanating from the Debt Management Committee. Each of these elements, together with the outcomes of the recent engagement of Rothschild & Co., will be fundamental in “creating more headroom for the country to be able to move ahead”. This quote from the Prime Minister potently underlining the gravity of our circumstances, our fiscal headroom is significantly challenged and debt is a major contributor thereto.
The Bahamas is at an important crossroad with its debt management strategy and the current state of affairs demands urgent action. Monitoring the country’s 09/29 (6.95% coupon) and 20/32 (8.95% coupon) bonds over the last few months, together with various press reports, paints a disconcerting picture of the challenges the country faces with debt. At the time of writing the price of these bonds were 50.89 (one month ago – 72.73) with a yield of 21.03% and 57.31(one month ago - 69.15) with a yield of 19.81%, respectively. Comparing the trending yields to the coupon rates and the trajectory of decline over the last twelve months delivers a very unsettling picture. The credit market is not convinced of the country’s credit-worthiness as espoused by policy makers.
There are two main things happening. The price being offered for the bonds is dropping rapidly, both down to the fifty-percentile discount range. Consequently, the yields are up significantly, indicative of the cost of debt to the country should it issue additional debt at this time. These yields are well beyond levels that prevailed at the time of the recent debt transaction led by Goldman and Sachs. At face value, the current information suggests an untenable premium approximately 17% above the recently increased US Treasury reference rate of 2.5%.
THE RECENT BUDGET
The PM’s recent budget presentation had one area that I discussed then as a potential “big miss”, suggesting that the debt strategy discussion was not as robust as anticipated. In that presentation, there was only a brief mention of what the Debt Management Committee would be doing. The fear was that this could be misinterpreted by the market as a signal that we are not yet fully on top of the issues. I wrote the following in an article: “The biggest miss in the budget presentation by the PM might be in not having a fuller discussion around debt and the debt management strategy. The fact that there is not yet any tangible outcome to report might not be well received by the credit market. Juxtaposed against the importance and state of the debt stock, a more tangible position would be preferred.
'Contextually, projected deficits for FY2021/22 of $756.6 million and 2022/23 of $564.3 million easily makes this case. Laying out a persuasive narrative around the debt management - an issue which seemingly the IMF and the administration is yet to be on the same page - would have been valuable.” It was my belief then that while the budget offered a number of positive initiatives, having regards for constraints and limitations, a less than comprehensive discussion on the debt strategy itself could have created adverse messaging. Based on subsequent developments it would appear that this is the case. Policy makers, based on their own expressed views, and the credit market, based on the trading activity of the Bahamian bonds, are in full disagreement on The Bahamas’ credit worthiness. Unfortunately, it is what the market believes or can be convinced of which matters. Potential high priced debt coupled with highly disruptive uncertainties continue to create pressure both for debt management in and of itself, but also the plans of the administration as detailed in the budget. Headroom is needed to effect initiatives, to facilitate adjustments and to come to terms with the future of the debt.
I further stated in the article, “This exclusion might represent the most significant area of risk to government’s overall plans as improvements in our credit circumstances is urgently needed to start creating fiscal space to create greater flexibility. This should also be seen through a credit worthiness lens. If the question were raised as to how this budget has improved the credit worthiness of the country, an honest answer would be that the projected trajectory is positive, but overall the needle will not move significantly. The inability to do that at this stage demands greater focus on lenders and the credit market”. The recent explanation of the reason for the engaging Rothschild speaks directly to this. The government has so far not able to effectively convey to the credit market its views as to the improvements in our economic fortunes. There is great urgency in this happening as it affects and has the potential to significantly damage the foundations of our economic projections. Economic Dignity, a cornerstone of the budget presentation and an intriguing developing economic philosophical stance of the Prime Minister, has come under pressure because of the increasing inflationary environment and the lack of room to maneuver. This mention of Economic Dignity is not a passing reference. On analysis, it is emerging as a culturally shifting economic thinking of the administration, a matter I will address later.
The current budget is built on the underlying assumption of consistent and significant economic consolidation and recovery. To date the numbers appear to be holding, even if one makes the argument of benefiting from the current inflationary environment. However, the most recent projections by the World Bank and pronouncement by the Central Bank suggest that the fortunes may be changing. The Governor has indicated that the economy is not bad but not where we expect it to be. The expectation for growth now takes us further away from pre-2019 levels than was initially expected. The inflationary impact because of war has become more sustained and is imposing significant pressures on consumers, especially in two areas, food and energy. The government is consistently being pressured to bring relief to the public, a move that holds important implications for both fiscal performance and the concept of Economic Dignity. The US and other developed economies have signaled great seriousness in seeking to tame inflation. The combination of these developments exposes the country, increasingly, to the uncomfortable possibilities of reduced revenue, which strikes at the heart of the current budget, and increased costs – unwanted development which would make the current effort to convince the credit market even more difficult.
THE ROTHSCHILD EFFECT
The Rothschild engagement holds the potential to unpack the message that has been missing in this ongoing “conversation” between The Bahamas and the international credit market. Many have decried its existence, but I am of the view that this is a step in the right direction, a seemingly very necessary step. There is no value in being too self-conscious about the matter, urgent solutions are needed. However, we should not ignore the fact that they are unable to do for us what we have to do for ourselves. Ultimately Rothschild can only tell the story which exists. Additionally we must not ignore the reality that as many positives as can be numerated from this move there are equally as many if not more inherent negatives. Why are we unable to tell the credit story? If Rothschild fails in telling the story what are the implications? Is their presence here indicative of a step closer to accepting that the options are extremely limited? What exactly will be the new information that it will deliver to the market? Will the conversation rest on credit fundamentals or does there exist important qualitative information that we are unable to communicate effectively?
The way in which the engagement of Rothschild & Co came to public awareness created space for speculation and might have itself caused more challenges than were necessary. It was reported suggesting that there was a path towards broad-based restructure being contemplated. Despite subsequent clarifications, this would have sent important information into the market place. Further, the explanation may have not fully cleared the air. It was stated that Rothschild was engaged to help the government “better appreciate what can be done and where headroom can be created”. The fact is that headroom is either a function of increased revenue or reduced cost. The only way therefore to achieve fiscal headroom from the current debt perspective is to have cheaper debt, an immediate replacement, or significantly extended maturities neither of which seems a high possibility at the moment. The cost of debt is being impacted by the US Treasury actions and others in the European market, which increases the possibility that investors have started to make serious risk comparisons. Rothschild, therefore, has a challenging task on its hands. While there may be no correlation, the downward shift in the bond yields over the last week or so following the announcement has been significant. Rothschild, from my perspective, must deliver spectacular results or it will place the country in a lurch causing it to potentially suffer important setbacks. Bottom line is that every sensible citizen and well-wisher of The Bahamas should be praying for the best possible outcomes, I am!
DEBT TURNS ON PERFORMANCE
Since the start of the Pandemic, the Bahamas is in the best position to tell a different credit story. We must always remain mindful that the pandemic only made our circumstances worse it did not create it. The fiscal consolidation appears to be moving well; intake of revenue is increasing, compared to the last two years; the demand for touristic service is high; and despite significant headwinds, the world is back to a high level of normalcy. None of this though appears to be translating into positive developments on the national debt front. In fact, the movement is trending rapidly in the other direction in an almost contradictory manner. There might in fact be a significant disconnect at play that demands urgent response and remediation from policy makers.
Hubert Edwards is the Principal of Next Level Solutions Limited (NLS), a management consultancy firm.