Sir Franklyn: ‘Untenable’ Gov’t paying more than Arawak Homes
Hails Central Bank’s public brokerage reversal as ‘correct move’
Argues ‘not the time to make it more expensive’ to get Gov’t debt
By NEIL HARTNELL
Tribune Business Editor
A well-known businessman is arguing that the Government’s securities must again become “the best debt in the country” as he hailed the Central Bank’s reversal of its public brokerage services.
Sir Franklyn Wilson, who had been fiercely critical of the banking regulator’s planned move, told Tribune Business it was “untenable” for the Government to be paying a higher rate on its long-term debt securities when companies such as his Arawak Homes were able to borrow from the same commercial banks “at 5 percent or less”.
This, he argued, represented a reversal of the long-standing tradition where government debt attracts the lowest borrowing (interest) costs because lenders have almost complete confidence in its ability to fully repay on time. Government paper, and the interest coupons attached, typically provide the benchmark or standard against which private sector loans, bonds and other debt is priced, but this no longer prevails thanks to the post-Dorian and COVID debt blow-out.
Those twin crises merely worsened a fiscal situation that had been deteriorating prior to 2019, and Sir Franklyn’s point was illustrated by the Government’s latest Bahamas Registered Stock issue. Virtually all the $17m raised was via 20 and 30-year bonds, which carried interest rates of 6 percent and 6.5 percent, respectively.
The Sunshine Holdings and Arawak Homes chairman, meanwhile, hailed the Central Bank’s decision to continue providing public brokerage services “until further notice” as “the right public policy move” because it would have reduced market access to government securities at the very time The Bahamas needs to broaden the available investor pool to retail investors especially.
Had the Central Bank exited as planned, government bonds and Treasury Bill investments would only have been available through private Bahamas-based broker dealers such as RF Bank & Trust and CFAL, which would have charged a fee for their services and thus made access more expensive.
Confirming that this was the focus of his concerns, Sir Franklyn said of the Central Bank u-turn: “It’s, in my humble opinion, the right public policy move. It’s the right public policy move because we want to get more people involved in buying public sector debt securities. We have to make it as easy as possible. This is not the time to make it more difficult and expensive to get debt. I never understood why that made sense.
“It was the right thing to do. The original cancellation was not prudent in prudent in my view. Timing had a lot to do with my view because it’s never the right time to do the wrong thing. It’s not just about when the economy has rebounded, but when the capital markets are a hell of a lot stronger.
“There has to be more participation in the capital markets, and a lot of changes need to take place in them. There has to be a higher level of confidence in the capital markets. All these things need to happen first.”
The Central Bank had previously unveiled a strategy to gradually exit its long-standing historical role as registrar and transfer agent for Bahamas Registered Stock (BRS) and Treasury Bills (TB), facilitating primary and secondary market access to these securities for investors.
Asserting that this would “better align its activities with international good practices”, the Central Bank said it was to cease providing such services completely by New Year’s Day 2023. In a phased wind-down, it was to stop taking on new investors in government securities by March 1 this year.
Access to government securities would subsequently only be available through a BISX-registered broker-dealer, and all existing investors were to transfer their portfolios to the same broker/dealers by year-end 2023. However, after “considering market feedback”, the Central Bank said it had “decided to continue to accept applications for domestic government securities from new and existing individual investors until further notice”.
It thus continues to facilitate the purchase and sale of government securities. The Central Bank’s reversal comes amid efforts to broaden and expand the pool of government securities investors given that traditional institutional buyers, such as the commercial banks, insurance companies and pension funds are up against their prudential and regulatory limits when it comes to the amount of debt they hold on their balance sheets.
Sir Franklyn, meanwhile, said the Government’s debt needs to regain the status of being market leader. “My overall point is this must be part of a bigger picture where government debt is the best debt in the country,” he told Tribune Business.
“What is happening today makes no sense, where the Government is paying 6 percent to 6.5 percent for debt while the banks are charging companies like Arawak Homes, who are looking for money, they’re prepared to lend at 5 percent or less.
“That has got to change. That’s the fundamental reality. The Government’s debt in Bahamian dollars needs to be seen as the best debt in the country. That’s what’s got to happen. That’s how it always works. By definition of money, when I was in business school, it was the price the Government could pay,” Sir Franklyn continued.
“If that is the definition of money, how could a price for the Government be less secure? It’s untenable. Whatever the explanation is for it, it has to change.” The answer, though, is not hard to locate with a national debt that is currently above $11.8bn and a projected $564m fiscal deficit for the upcoming 2022-2023 fiscal year.
The Bahamian capital markets and investors, like their international counterparts, are attaching a greater risk premium to Bahamas government debt due to the impact of Hurricane Dorian and COVID-19. This means the Government must pay more for its debt, especially since the creditworthiness downgrades by Moody’s and Standard & Poor’s (S&P) have forced Bahamian institutional investors to discount their existing holdings.