• Investors need greater ‘trust and confidence’ in Gov’t
• End ‘sweet talk’ for domestic capital market ambitions
• As ‘practically cut-off’ from the international markets
By NEIL HARTNELL
Tribune Business Editor
The Government must build greater “trust and confidence” in its fiscal plan among Bahamian investors given it has “no choice” but to almost exclusively tap the local capital markets to meet its nine-figure deficit financing demands.
Financial executives told Tribune Business that, with access to the international bond and financial markets almost completely cut-off by a combination of global interest rate hikes and The Bahamas’ creditworthiness being cut to ‘junk’ status, the Davis administration must eliminate any “sweet talk” when it comes to the country’s financial situation it it wants to achieve its ambitions of broadening the base of domestic investors in government securities.
Michael Anderson, RF Bank & Trust’s president, said in a recent interview that while excess liquidity in the Bahamian commercial banking system remains plentiful there is “not a large market of people” wanting to buy Bahamian dollar bonds and Treasury Bills given concerns over the near $11.5bn national debt and the Government’s sustained track record of multi-million dollar deficits.
The Prime Minister, in his end-May Budget presentation, used guarded, technical language to admit that the Government has little option but to meet the bulk of its financing needs locally given the burden that prohibitively high international interest rates would impose on the Bahamian people through greater debt servicing costs, as well as sucking more money away from essential public services.
The Government has traditionally relied on major institutional investors, typically the National Insurance Board, commercial banks and insurance companies, as well as pension and mutual funds, to pick up the majority of its Bahamian dollar debt issues. However, many of these institutions are now close to their prudential and regulatory limits on the amount of government debt they can carry, while some have had to discount their existing holdings due to credit downgrades.
This is why Mr Davis sought to broaden the domestic investor base by offering incentives for companies that are non-financial institutions to buy government paper. This was done by amending the Business Licence Act to codify that companies who invest in Bahamian dollar bonds and Treasury Bills will enjoy tax-free interest earnings on these securities as these returns will not be included in the annual Business Licence calculation.
“I think they [the Government] really don’t have any choice at the moment other than to try and source capital locally,” Mr Anderson told this newspaper. “It’s a difficult space to raise money in. While there’s money in the bank, and institutional monies available, it’s not necessarily that those people want to buy government debt.
“They end up with a relatively small number of people wanting to buy government debt. It’s not a large market of people wanting to buy in.” The Central Bank’s just-released report for May 2023 confirms that surplus commercial bank liquidity, representing assets available for lending and investment purposes, stood at a healthy $2.9bn at month’s end. However, this number has been steadily increasing month-over-month for many years, showing potential investors remain skittish.
The Davis administration, which has had to deal with unsettled international bond markets since coming to office in mid-September 2021, sought to meet virtually all its 2022-2023 deficit financing needs through a combination of the Bahamian capital markets and multilateral institutions, which typically offer lower interest rates and more favourable terms than commercial lenders.
However, despite this strategy, the Government still accessed some $232.3m in International Monetary Fund (IMF) special drawing rights to help meet the financing needs associated with its projected $520m full-year deficit. The seeming haste with which the transaction was executed, amid Opposition claims of laws being broken, indicates that the Davis administration had an urgent need to access low-cost foreign currency financing to pay-off a liability that was coming due.
Mr Anderson, meanwhile, pointed to concerns over upcoming foreign currency debt maturities that were first flagged by Moody’s. “They practically can’t access capital on the international market because the rates are too high,” he told Tribune Business of the Government.
“The Prime Minister said it was virtually impossible for the Government to raise capital [that way], and they’ve got this maturity coming up in the next couple of years which they may find difficult to pay off and raise new capital. I don’t know how they fund that at a credible rate.”
Moody’s, in its post-Budget assessment on The Bahamas, argued that the Government’s greatest short-term fiscal challenge lies in refinancing some $1.9bn worth of debt principal that is set to mature during the 2023-2024 fiscal year at a reasonable interest cost to Bahamian taxpayers.
“The major risk for the sovereign [The Bahamas] centres on challenges in financing and refinancing its upcoming maturities. Even with a narrowing fiscal deficit that turns to a surplus in fiscal 2025, the Government faces large gross financing needs. The Government will see a peak in maturities due in fiscal 2024, when gross refinancing needs reach 14.3 percent of GDP,” Moody’s said.
“Although the Government doesn’t intend to access international bond markets through commercial issuance, it will need to find alternative financing sources to repay upcoming external amortisations amid still tight financing conditions. Refinancing upcoming maturities at higher borrowing costs would weigh on the Government’s debt affordability.”
The Bahamas’ existing listed foreign currency bond issues were last night still trading at a discount, as they have been for a full year, with yields remaining at double digit levels. The $825m foreign currency bond, placed at an 8.95 percent coupon at COVID’s height, closed on the Frankfurt Stock Exchange yesterday at a near-14.5 percent discount to par value with yields at 11.85 percent.
In similar fashion, the $300m bond placed at 6.95 percent prior to the pandemic closed at a 20.5 percent discount to par with yields at just over 11.9 percent. All of which indicates that the Government will have to pay double digit interest rates on its debt should it seek to access the foreign capital markets at present.
As for Bahamian dollar capital raising, Mr Anderson pointed out that local investors had shifted to shorter-term maturities and away from the long-term 20-30 year paper that the Government has traditionally favoured. “I think they’re having some success placing small amounts of long-term bonds, 20-year and 25-year, but there’s no big market for them,” Mr Anderson said.
“The bulk has moved to shorter maturities, six month to a year type of maturities. That’s most of the new money raised by the Central Bank for the Government in that space. A lot of the money is being rolled over.” Investors moving towards shorter-term maturities is a sign of increased concern, and reduced confidence, in the Government’s fiscal health following the debt blow-out exacerbated by Hurricane Dorian and COVID-19.
Gowon Bowe, Fidelity Bank (Bahamas) chief executive, said the Government’s domestic capital markets ambitions hinge on a credible strategy to restore its fiscal health and creditworthiness, and meeting the benchmarks and timelines set out in this plan.
A sound debt management strategy, and “moving from deficit to surplus”, are key elements to “establish a level of trust among retail investors” and non-financial institutions and entice them to invest in government paper, he added.
“There’s a paper in circulation from the Central Bank, done in conjunction with the Commonwealth Secretariat, that looks at the issuance of government securities as an overall process, and raises the question as to what is needed to improve the process of government securities,” Mr Bowe said. “That is much wider than saying we have an issuance process, we have a broker process. It’s looking at what information will be necessary.”
Acknowledging that it will be “challenging” for the Government at present to generate substantial interest in its 20 and 30-year bonds, he added that it was vital for the Government to present a five-year fiscal projection and stick to the targets set out to build credibility. The projected near-80 percent decline in the deficit for 2023-2024, from $520m to $131m, will also help ease the administration’s financing burden it is met.
“The Government has to demonstrate confidence should be reposed in them,” Mr Bowe said. “It cannot be that government securities are the best investment. It has be demonstrated why they are the best investment.... It’s really about them building that trust and confidence. No sweet talk; a clear plan... for all our sakes.”