The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government is exploring a "debt-for-nature swap" with the Inter-American Development Bank (IDB) that could result in at portion of its $11.2bn national debt being forgiven, the Prime Minister said yesterday.

Philip Davis KC, unveiling the 2023-2024 Budget in the House of Assembly, said the move was part of wider discussions with the multilateral lender on "two policy-based guarantees" designed to give The Bahamas access to financing at lower-cost interest rates.

"The Government is presently seeking IDB Board approval for two policy-based guarantee instruments, which will allow access to market financing at even more favourable rates," Mr Davis said. "These guarantees will support the Government’s debt management operations during the upcoming 2023-2024 fiscal year, which also contemplates a debt-for-nature swap.

"A debt-for-nature swap is an arrangement whereby a developing nation can have a portion of foreign debt forgiven, typically in exchange for committing to specific conservation measures.... A key component of the Government’s fiscal strategy is to use access to the Caribbean Development Bank and IDB financing to lower our overall funding cost by leveraging the institutions’ AAA credit rating.

"Reduced borrowing costs and improved debt tenor are tools which should improve the overall debt profile of the nation." Mr Davis said the Government's borrowing strategy focus remains to secure the majority of its financing needs in the domestic Bahamian dollar market rather than with international capital markets because global interest rate hikes have raised this nation's costs.

"The Bahamas’ borrowing costs had begun to experience a downward trend in the previous quarter, but the cost of borrowing rose at the end of March 2023," the Prime Minister added. "At the end of the third quarter, the total average cost of borrowing for current outstanding debt had risen to an interest rate of 5.55 percent.

"This is notably higher than the previous year's rate of 4.93 percent at the end of March 2022. This increase in borrowing costs is primarily attributable to the higher costs associated with external loan facilities. More specifically, the average interest rate for external financing has risen by 1.99 basis points, resulting in a rate of 5.55 percent as of March 2023 compared to the preceding year's 3.56 percent."

Mr Davis contrasted this with the Bahamian dollar debt market, adding: "The cost of borrowing in the domestic market has been declining over the past quarters. The average interest cost for domestic loans subsided by 27 basis points to 4.62 percent at end of March 2023, from 4.89 percent in the previous year. And the average interest cost for domestic bonds subsided by three basis points to 4.63 percent at the end of March 2023 from 4.66 percent in the previous year.

"These statistics affirm the Government's latest medium-term debt strategy, which aims to shift its borrowing away from costly external commercial debt. Such debt has seen a sharp increase over the past five years, including recent interest rate hikes. This strategic move will enable the Government to once again rely predominantly on the domestic market to meet its financing requirements."

To aid this initiative, Mr Davis confirmed that an International Monetary Fund (IMF) team had visited The Bahamas earlier this year to assess the domestic capital markets. "In our view, The Bahamas has the potential to expand the domestic government securities market and reduce its dependence on external borrowing. This shift towards higher domestic financing could provide a more sustainable and stable source of funding for the country's needs," he added.

"In order to assist with the development of the Government securities market in The Bahamas, a team from the International Monetary Fund conducted a technical assistance mission in March 2023. During their visit, they evaluated the current state of the country's sovereign debt market and provided suggestions for improvement.

"These recommendations were focused on three main areas: The primary market, cash management and investor relations management. The IMF team suggested implementing a more structured approach to these areas in order to facilitate growth and success in the local currency government bond market."

Mr Davis said The Bahamas now needs to build on the Bahamas Government Securities Depository's (BGSD) roll-out in January 2023, which allows the direct and automated settlement of trades in government debt. "Looking ahead, the BGSD will roll-out competitive bidding for primary market Bahamas Registered Stock issuances early in the fiscal year, thereby allowing the market to price Government bond issues," he added.

"This initiative will enhance price transparency, allow for the development of a true domestic yield curve, while at the same time strengthening the local bond market... In terms of policy reform, a significant step forward will be to promote and encourage an increase in the level of government securities held by regulated and unregulated businesses.

"Therefore, in this Budget, the Government is removing any tax on the interest income that a business would otherwise incur by holding any type of government securities. In addition, there will be the formulation of a master repurchase agreement for government securities," the Prime Minister continued.

"This initiative will add agility to the local bond market and bolster Central Bank monetary policy operations. In the long-term, the Government will seek to implement buy-backs and switches to standardise and increase the depth of securities trading across the secondary market."