The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Fears have been raised that the Government's debt costs may double with any new COVID-19 foreign currency borrowings it undertakes as a result of unfavourable secondary market conditions.

Tribune Business late last week obtained data showing that Bahamian bond debt with various maturities, ranging from around five to 15 years, is being traded by investors at significant discounts compared to its 'face value' at the time it was first issued.

Potential purchasers of the Government's foreign currency debt are seeking discounts ranging from 21.25 percent to almost 28 percent, depending on the length of time until the bond principal has to be repaid, while sellers are willing to accept discounts of anywhere from 17.5 percent to 25.5 percent.

And, more significantly, the yields-to-maturity - representing the returns investors are seeking - are all in the double digits, ranging from 10 percent to a maximum of more than 13 percent. This, financial sector sources told this newspaper, suggests that any new foreign currency borrowings will have to be priced at an 11-12 percent interest rate to ensure they are fully subscribed.

Such interest rates, they pointed out, would be around double the 6 percent coupon attached to The Bahamas' last $750m US dollar borrowing that was placed in November 2017. The significance for Bahamian taxpayers, businesses and households is that they will potentially face being burdened with much higher debt servicing costs when the Government moves to fill the financial and economic holes caused by COVID-19.

The discounts and higher returns sought by international investors from The Bahamas' US dollar sovereign debt also reflect the impact of Hurricane Dorian on the economy and the Government's finances, as well as the recent downgrade of this nation's creditworthiness by Standard & Poor's (S&P) and the threatened one by Moody's.

The cost of all these events, together with COVID-19, will likely emerge when the Government seeks to raise foreign currency debt financing that will reach into the hundreds of millions of dollars - if not low billions - to cover already-staggering deficits as well as stimulate the economy during the new 2020-2021 fiscal year that begins on July 1.

K Peter Turnquest, deputy prime minister, declined to comment on the debt issue when it was presented to him by Tribune Business. However, one Bahamian financial sector source, speaking on condition of anonymity, said: "If the Government has to go out to borrow money now in US dollars in the market, the rates it looks like it's going to have to pay are somewhere around 11-12 percent depending on the maturity.

"It's [the yields-to-maturity] indicative of what the country has to pay now for US dollars if it has to go out and borrow. The debt servicing side of any US dollar loans are going to be very close to twice the price at which they are issued. It will not be easy for sure to take on any significant new level of debt."

The yield curve for the Government's US dollar debt is now in an "inverse" position, meaning that longer-term debt - which traditionally attracts the highest rates, yields and discounts because it is seen as more risky - now enjoys the lowest. This is because COVID-19, Dorian and the downgrades have all made The Bahamas' short-term debt a much riskier proposition.

The source, meanwhile, also voiced concern at how the interest rates attached to the Government's foreign currency debt could impact those on its Bahamian dollar debt that is placed in the local market given the Central Bank's recent trend of offering them at the same price.

"If the local government debt is repriced higher, so the interest rate moves higher, in effect it will drop the value of debt held already by existing participants, of which the largest single holder is the National Insurance Board (NIB)," they explained. "It is already struggling in terms of its assets, so it would be a significant blow if government costs go up and the value of debt held by NIB goes down."

There could also be implications for bank, insurance company and pension fund balance sheets, the source added, as any interest rate differential could also force a repricing of their existing government debt holdings. These have never been discounted, and are almost always valued at "par" or the value they were acquired at.

However, government sources told this newspaper that it did not immediately have to rush to raise foreign currency borrowings in the international markets. They suggested the Ministry of Finance would wait until later in the fiscal year when market conditions and interest rates may prove more favourable after the Bahamian economy - and others - re-open post-COVID-19.

Marlon Johnson, the Ministry of Finance's acting financial secretary, told Tribune Business that fears about a doubling of interest rate costs on any new foreign currency debt belonged in "the realm of speculation".

He added: "The truth of the matter is that the bond markets for all developing countries are racing similar prospects in the medium term because their economies are closed right now," he argued. "Not unless and until their economies open back up will we see any fundamental change in the dynamics of the market right now.

"If and when the Government decides to seek to raise money in the foreign markets the environment will be a bit different because it will not happen in the coming weeks. I think you'll see the bond market firm up and look different once economies start to open back up.

"What you're seeing happening in the marketplace is a reflection that a lot of economies are closed, and some people are looking to liquidate their holdings. Prices and yields will start to solidify once countries start to reopen because then the prospects change." The Prime Minister last night said The Bahamas was looking to re-open to commercial aviation, and mass market stopover tourism, by July 1.

Mr Johnson also said the Ministry of Finance had not received indications that some local banks, insurance companies and other institutions had reached their statutory and regulatory limits in terms of the amount of government debt they can hold on their balance sheets.

"That isn't our understanding of the situation right now," he added. "We are looking to optimise the borrowing mix between Bahamian and foreign currency debt to make sure we do as much as we can to support the foreign currency holdings."