The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank has regained the lead role in the issuance of domestic Government debt, amid plans for “important modernisations” in how it is priced and investor ownership tracked.

Tribune Business can reveal that a report from the Commonwealth Secretariat, which is thought to be in draft form only, has influenced the Government to take responsibility for the issuance and pricing of its domestic securities back from the private sector after just one year.

This newspaper’s financial industry contacts, speaking on condition of anonymity, disclosed that the Commonwealth Secretariat recommended that the issuance of Bahamian government debt should take place primarily via the Central Bank, rather than broker/dealers.

As a result, Tribune Business was told that the Bahamas Government Stock (BGS) and Treasury Note programmes, which were being handled by RoyalFidelity Merchant Bank & Trust, have effectively been placed ‘on hold’ for the time being.

The only activity that the Bahamas-based investment bank is currently conducting is the ‘roll over’ of existing short-term Treasury Note issues as they mature.

In contrast, the Central Bank has already placed a $30 million, 20-year Bahamas Government Registered Stock (BGRS) issue, which was fully subscribed at end-August and with all categories - individual investors, institutions and credit unions “fully allocated”.

John Rolle, the Central Bank’s governor, told Tribune Business that the regulator would be “more active than last year” when it came to the issuance and placement of the Government’s domestic debt securities.

While not commenting directly on the changes, Mr Rolle confirmed that the Commonwealth Secretariat had “provided general advice.... in terms of the approach” the Government should take.

“Even with the private bank [RoyalFidelity] managing some of the issues, there were occasional issues where the Central Bank handled things,” he told Tribune Business. “In instances where there needed to be a swift issue, the Central Bank resold it.”

Mr Rolle said several key reforms for the Government’s domestic debt market are set to be unveiled over the next year, including changes to the way bond issues (BGRS/BGS) are priced so as to obtain “the best interest rate possible” and minimise the administration’s debt servicing costs.

He added that the planned reforms also involve moving to an electronic ‘book entry’ system for recording the ownership of government debt securities, and away from the unwieldy paper-based certificates currently in use now.

“Going forward, you should expect to see some initiatives from the Government side that are focused on important modernisation of the Government’s securities,” Mr Rolle told Tribune Business.

“There are certain rules that the Central Bank has to follow in terms of making these advances. We’ve spoken for many years about moving away from paper certificates, and a lot of the issues last year would have been in book entry form.

“One of the changes that will bring innovation going forward is making sure that system is perfect for government bonds,” the Central Bank’s governor added.

“That will have a lot of other benefits for how these securities are used in other transactions; how you can use them as collateral.

“You can use them as collateral now, but it’s a more convoluted process as the certificates [proving government bond ownership] have to move about and have certain changes made to them. Whereas when we move to an electronic platform, these changes will happen much more conveniently.”

Then there is the pricing of government debt securities. “The other modernisation change that we have been focused on is the way the pricing of government debt is done in the market,” Mr Rolle told Tribune Business.

“We want to get to a state where the Government auctions issues and we get the best interest rate possible on the issue.”

Mr Rolle said the reform initiatives were likely to be announced as joint initiatives between the Ministry of Finance and the Central Bank moving forward.

“I think we believe we can make some advances in this area,” he added. “I would expect that over the year some of these reforms will start to materialise. We’ll certainly be making some announcements later in the year in terms of what they start to look like; the major deliverables.”

The Government’s domestic debt market accounts for the biggest component of the Bahamian capital markets, with between $3-$4 billion in issues currently outstanding. It provides the administration with its greatest source of debt financing.

“We’ve gotten general advice from the Commonwealth Secretariat in terms of the approach,” Mr Rolle said. “We would have got comprehensive input from them in terms of the approach.

“It would have been more the kind of infrastructure we should go to, a fully functioning book entry system; the auction system, and issues relating to the control and trading of government securities, and how to track trades.”