The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government was yesterday warned it cannot take unlimited access to the Bahamian debt markets for granted, despite Moody’s optimistic liquidity assessment.

Gowon Bowe, the Bahamas Institute of Chartered Accountants (BICA) president, told Tribune Business that local investors are no different from their international counterparts when it comes to assessing Bahamian sovereign debt risk.

Implying that he disagreed with Moody’s analysis, Mr Bowe said new international financial reporting standards (IFRS) and their own regulatory requirements could limit future appetite for government debt among institutions that have traditionally been its largest purchasers.

The credit rating agency, in electing to preserve the Bahamas’ ‘investment grade’ rating, said that despite the Government’s increased borrowing needs “liquidity risks remain low on account of a favourable debt profile and a relatively captive domestic investor base”.

Moody’s added: “As of March 2017, domestic debt accounted for 73 per cent of total government debt, with commercial banks holding 40 per cent of the domestic debt, and the Central Bank and other public corporations, 28 per cent.

“The overall maturity profile is favourable. Short-term domestic debt represents only 12 per cent of total debt. External market debt - four global bonds - have an average maturity of 12 years, while domestic bonds have average maturities of 8.4 years. The Bahamas debt profile incorporates relatively low refinancing risks given the dominant share of local creditors and the presence of capital controls, conditions that allow the government to enjoy access to a deep pool of domestic savings.”

Mr Bowe, though, said he was unsure whether the Bahamian capital markets will be “fully accessible” to the Government if its fiscal consolidation plan fails, and the $7 billion-plus national debt and associated ratios continue to rise as a result of persistent Budget deficits.

The Moody’s analysis appears to assume that Bahamian institutional and retail investors will continue to purchase government bonds (BGRS) and other debt securities come what may, given that their Bahamian dollar holdings have nowhere else to go.

However, Mr Bowe argued: “Retail and institutional investors want to see credible policies by the Government to reduce the debt level. While cash is available, the mechanism for doing so [accessing it] is no different from the outside world.

“They’ll [investors] be looking for credible policies, including the achievement of milestones, and that will dictate whether you’re able to access that now and in the future. They’ll ultimately be looking, just like external partners, for credible policies and the quality of financial performance.”

The BICA president said Moody’s analysis had focused on the fact 73 per cent of the Government’s debt was held by Bahamian investors, and denominated in local currency largely.

He implied, though, that the rating agency may have placed too much weight on this in seemingly determining that the Government has an inexhaustible supply of potential funding locally.

Bahamian commercial banks and insurance companies, together with the National Insurance Board (NIB) and other government corporations, have traditionally been among the largest consumers of government debt.

Mr Bowe, though, said these entities all have their own capital and regulatory requirements, with some also possessing credit ratings from the likes of A. M. Best that they need to maintain.

And John Rolle, the Central Bank’s governor, yesterday said reforms had been proposed for its governing Act that will reduce the amount of government debt it can hold.

He told the Rotary Club of south-east Nassau that this, together with a reduction in the Government’s deficit, would place the Central Bank’s “balance sheet on a stronger footing” and “open up the conversation a lot more” when it came to exchange control liberalisation and flexibility.

Mr Bowe, meanwhile, said traditional holders of Bahamian government debt would likely be impacted by the introduction of IFRS 9 on January 1, 2018.

Explaining its implications, he told Tribune Business: “If you live in a Caribbean country where the credit rating is not investment grade, even if they’ve not defaulted, how do you justify not taking a hair cut or discount on it?

“It will have an impact for local financial institutions. Everyone is having to look at the credit rating, or the credibility of the investments on their book.”

The BICA president added: “The Government has benefited from always paying its financial obligations, always being a stable country, and persons seeing the prospects of the country in their entirety. Persons were willing to acquire the debt.”

To preserve this, Mr Bowe said the “negative news needs to cease” concerning the Bahamas’ economic growth and fiscal performance. He added that the deficit and debt situation needed to be turned around, and any future government borrowings and debt raisings be for income-generating projects.

Mr Bowe said these included the likes of airports and bridges/roads with tolls, as investors could gain confidence from the fact they were backed by revenue streams.

Moody’s added: “The Bahamas’ average annual gross borrowing requirements were previously in line with the median of the ‘Baa’ category, but an unusually large deficit in fiscal year 2016-2017 caused government financing needs to exceed historical trend levels of some 6-7 per cent of GDP.

“We expect annual financing needs to decrease to some 4 per cent of GDP in the coming years if government efforts prove successful in reducing the fiscal deficit.”