• 26% of $10bn Gov’t debt to mature by June
• Fiscal Council member optimistic on roll overs
• Sum involved equals 2033-2065 repayments
By NEIL HARTNELL
Tribune Business Editor
The Government must “build confidence” among Bahamian investors to successfully refinance almost $2bn in domestic debt coming due by June 2022, a top banker urged last night.
Gowon Bowe, also a member of the Fiscal Responsibility Council, told Tribune Business he was optimistic that the Davis administration will be able to persuade sufficient investors to roll-over some $1.907bn in Bahamian dollar principal that is maturing during the year’s first half due to several trends that were in its favour.
Pointing to the lack of suitable alternative investments that provided similar levels of liquidity, and counted towards regulatory capital for banks, insurers and other institutions, the Fidelity Bank (Bahamas) chief also argued that government debt is generating higher returns than the meagre interest paid on bank deposits.
Mr Bowe added, though, that the Government needed to safeguard its fiscal plans by giving investors comfort that it will not simply use improving post-COVID tax collections to increase public spending.
Reiterating his call for the administration to produce “a more comprehensive debt management strategy”, he added that the Government should hold regular investor briefings with those holding its bonds and “maintain confidence” that their investments are secure if it is to refinance the spike in maturities via rollovers as opposed to raising new borrowings.
Almost 26 percent of the Government’s $10.318m direct debt is due to mature in 2022, split into some $1.905bn in domestic principal and a further $179.7m that is held by foreign investors. Data provided by the Ministry of Finance’s 2021-2022 second quarter debt bulletin thus shows some $2.085bn in debt principal is due for repayment between January and June 2022.
“Refinancing risk is a key risk for the Government, with the average time to maturity (ATM) settling at seven years at end-December 2021 and an average 25.85 percent of the portfolio maturing in one year,” the report conceded.
“The latter reflected the impact of the short-term nature of Treasury bills and notes, which elevated the percentage of the [domestic] debt maturing in one-year to a high of 38.03 percent. By comparison, only 9.09 percent of the external debt is maturing within one year.”
Picking up on this, Mr Bowe said the heavy weighting of short-term Treasury Bills in the debt coming due will likely make it easier for the Government to roll over, or renew, much of those borrowings with existing investors continuing to hold these securities on the same terms, returns and conditions.
“Although they are due every three and six months, they have been held for an extended period of time,” he told Tribune Business of Treasury Bills. “These ones certainly have their financing risks because, if the holders of these instruments say they are ready for them to mature and cash out, they have to be financed from other proceeds.
“But, up to this point in time, these have been advantageous to banking institutions because they provide short-term liquidity and contribute to regulatory liquidity. I would imagine a large portion of the due amount is on the three to six-month Treasury Bill side.”
That was confirmed by the Ministry of Finance’s quarterly debt bulletin. And, given the growing risk aversion to long-term government debt securities due to The Bahamas’ fiscal crisis, slow post-COVID recovery and credit rating downgrades, Mr Bowe said many of the bonds issued over the past year had carried maturities of just 12 months.
This, in turn, had helped inflate the principal sums maturing by end-June 2022. “The Government had the shorter instruments last year; a lot of their debt securities had a one-year term,” Mr Bowe said. “There was $100m issued at different junctures with one-year maturities.”
He added that these securities, too, carried “some refinancing risk” and Ministry of Finance officials have already been contacting investors to determine whether they plan to roll over or cash out. The Fidelity chief, as a holder of some of this debt, said he had already indicated his BISX-listed institution will seek the latter option.
“The truth of the matter is that, in this environment, for several reasons most of the major investors are looking for short-term paper,” Mr Bowe added. “We have to be honest and candid about it. It’s largely driven by uncertainty over our economic performance and the Government’s credit rating.
“It’s a little bit chicken and egg. You stabilise the rating by having a more comprehensive debt management plan that allows investors to see how the debt trajectory is managed downwards, but they need a level of confidence to give the Government the time to do so.
“What you’re seeing coming down in the next 12 months is a lot of roll overs where the Government has to maintain the confidence of holders of these instruments. There are not a lot of alternative investments, so from that perspective they need to keep people confident to hold the debt and roll it forward.”
With only the likes of insurers and pension funds, who need to match long-term assets to liabilities of similar duration, interested in government debt with a maturity of beyond one year, Mr Bowe said the administration needed to improve dialogue with its financiers.
“The performance around debt management and cash flow needs to be bolted on to quarterly reporting,” he advised the Government. “In reality, they are interdependent. The Government’s debt management strategy is going to impact its ability to finance its deficit, and the deficit is going to impact cash flow, which provides evidence of its ability to meet payments as they come due.”
Assessing the likelihood that the Government will refinance its $2bn-plus in maturing debt without any major difficulty, Mr Bowe concluded: “They are benefiting from a couple of positive trends. One is that the interest rates being offered by them, while cheaper than previous long-term debt, are certainly better than what people are seeing in non-government securities and banks with similar terms and maturities.
“The interest rates are attractive, and the economic performance is looking upward. Greater revenues are being collected, and they have now to convince debt holders that additional tax revenues are not being spent and that they will hold firm on expenditure so that any increase on the revenue side is not dissipated by expenditure.”
The Ministry of Finance’s public debt report agreed, although it glossed over the huge spike in domestic debt becoming due in the 2022 first half - an amount almost equal to the $1.929bn that has to be repaid in the 32-year period between June 2033 and June 2065.
“The distribution of public debt forecasted redemptions through 2032 continues to highlight the impact of the large portfolio of domestic bonds in the portfolio. These bonds are primarily held by commercial banks, public corporations and institutional investors, who tend to refinance issues amid the lack of readily available investment alternatives,” the Ministry of Finance said.
“The redemption profile is well distributed from 2023 to 2032, although there is a spike in domestic debt in 2023, and in external repayments in 2024 and again between 2027 and 2032, in line with the maturity of various international bond issues. The Government intends to smooth out these through appropriate liability management initiatives.”