The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Government yesterday forecast that the national debt will peak at $11.462bn in the next fiscal year with its ratio as a percentage of economic output declining steadily to 67.1 percent by 2026-2027.

The Davis administration’s 2022 Fiscal Strategy Report revealed it is relying almost solely on economic growth to keep key indicators, including debt and recurrent spending as a percentage of gross domestic product (GDP), in check while also financing a continued expansion in the size of government that is outpaced by revenue growth.

The $1.2bn expansion to $4bn in annual revenues by 2026-2027 is also intended to slash 2022-2023’s $564m fiscal deficit to just $105.5m next year, before the ‘red ink’ is eliminated entirely and the Government produces consistent Budget surpluses of $287.3m, $209.8m and $242.2m over the next three years. A surplus is achieved when the Government’s income exceeds its spending.;

Prime Minister Philip Davis KC, addressing the House of Assembly yesterday, said the Government is aiming for its first Budget surplus in the 2024- 2025 fiscal year. It is also aiming for revenue yields to improve to more than 24 percent of GDP that same year, and for “a measured reduction” in government spending to less than 23 percent of GDP.

Meanwhile, the Government’s medium-term debt management strategy report, also unveiled yesterday, exposed the increasing preference of Bahamian investors for its short-term paper given the perception of increased fiscal risks. The proportion of government bonds maturing in one year or less near-doubled year-over-year in 2022 to more than 10 percent of the outstanding debt stock.

“Market appetite for domestic bonds remained strong throughout fiscal year 2021-2022 and into the opening quarter of fiscal year 2022-2023, favoured by the elevated levels of excess cash in the banking system,” the report said.

“Of the $4.137bn in outstanding bonds at end-September 2022, the creditor profile was dominated by private sector investors (52 percent), many of whom tend to have a long- term investment preference. Next were commercial banks (24.7 percent) with liquidity requirements typically concentrated in the short to medium-term investment horizon, followed by public corporations (12.6 percent) and the Central Bank (7.2 percent).

“The proportion for insurance companies, which tend to match their long-term liability structure, moved lower to 3.5 percent from 4 percent in September 2021. Based on the maturity structure, 72.7 percent of the portfolio was held in the over 15 -year bucket, with an approximate doubling in the proportion for the one-year or less tranche to 11.3 percent from 5.7 percent at end-June 2021,” it added.

“Besides the gain in the over one to five-year tranche to 5.6 percent, lower shares were registered for the over five to ten-year (8.4 percent) and the over ten-15 year (1.9 percent) maturity buckets.” The medium-term debt management strategy report also conceded the need for reforms that broaden the investor base for the Government’s domestic bonds and improve market efficiency.

“Despite a diverse investor base in the Bahamian dollar bond market (comprising financial institutions, businesses, private individuals, credit unions, pension funds), the Government acknowledges the need to encourage new market players and achieve greater efficiency in the bond issuance process,” the report added.

“To this end, several initiatives are underway which focus on liquidity, transparency, secondary market trading, settlement mechanisms and investor diversification. Among these are the upcoming transition to an online auction for Bahamas Government Securities Depository-registered participants, the concurrent establishment of a new non-competitive bidding scheme carve-out for retail investors, and the introduction of a savings bond to promote a savings culture and support financial inclusion.”

The report also highlighted why, for the time being, the Government is avoiding the international bond markets given the unfavourable environment generated by interest rate hikes in the US and other developed countries, increased spreads and the negative investor sentiment displayed towards emerging market nations such as The Bahamas. This is despite “market outreach” efforts resulting in an eight percentage point yield reduction on the country’s short-term debt.

“The Bahamas witnessed significantly higher yields on its international bonds, by an average of approximately 520 basis points, through early November 2022,” it said. “Since the beginning of the COVID- 19 crisis, The Bahamas synthetic 10-year US dollar yield firmed progressively to reach a maximum of 14.7 percent in August 2022, and has gradually decreased since then.

“Although foreign currency debt refinancing needs remain manageable over the medium term, The Bahamas international yield levels have made the Eurobond market an unattractive source of funding. In late October 2022, the Debt Management Office launched a market outreach to the international investor base to realign market perception with the country’s healthy macroeconomic fundamentals and explain the Government’s diversified funding strategy for 2022-2023.

“This event... has helped to achieve a reduction of yields on the short end of the curve, with a decrease of more than 800 basis points for the 2024 Eurobond since October 2022. In the short-term, The Bahamas intends to access alternative funding sources on both external and domestic markets, including structured credits involving multilateral lenders, to secure funding at a lower cost.”