The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government is seeking "breathing room" by deferring debt repayments coming due, it can be revealed, as it last night confirmed it has applied for a $252m "emergency" International Monetary Fund (IMF) loan.

K Peter Turnquest, deputy prime minister, told Tribune Business the decision to seek financial assistance from the Fund did not signal The Bahamas is facing a "worst case scenario" post-COVID-19 but, instead, is merely "taking advantage of attractive borrowing facilities".

Emphasising that the loan is not part of an IMF-led "structural adjustment" initiative being imposed on The Bahamas, Mr Turnquest said the Minnis administration was "smartly availing ourselves" of a low-cost facility - with an interest rate of just 1.054 percent - to help support the COVID-19 response and other government financial operations.

"We are utilising the residual borrowing authority under the two resolutions we got for fiscal year 2019-2020," the deputy prime minister told this newspaper, referring to the mid-year Budget approvals obtained from Parliament. "No, we are not in the worst case scenario, but are taking advantage of attractive borrowing facilities."

The Ministry of Finance, in a statement, said the low interest rate and likely fast approval of The Bahamas' $252m request made it a better option than other available borrowing possibilities. The IMF Board meeting, during which this nation's application will be discussed, is set for early June and the funding will be available within three business days if approved.

It added that while the IMF loan must be fully repaid within five years, there is a three-year "grace period" before payments have to be made, thereby giving The Bahamas sufficient time to refinance "for a longer time horizon if the Government deems fit".

The Bahamas's decision to seek COVID-19 assistance from the IMF comes after multiple other Caribbean nations, including Jamaica, Barbados, Haiti and St Vincent and the Grenadines, have all gone the same route in seeking funding to tackle the pandemic's economic and health fall-out. In total, some 27 countries have preceded The Bahamas.

The move also comes as it was confirmed to Tribune Business that the Government is seeking to boost cash flow, and create increased fiscal headroom, by deferring principal repayment on at least some of its multi-billion dollar debt due to mature in the near-term.

Gowon Bowe, Fidelity Bank (Bahamas) chief financial officer, disclosed that the Government has already requested an extra year's "holiday" on principal repayments due on the $190m loan it took out in early March 2020 to finance Hurricane Dorian reconstruction.

He told this newspaper that debt management will be a critical component of the Government's 2020-2021 Budget, due to be presented in the House of Assembly in less than 72 hours, given that it could create critical "headroom" for a Public Treasury facing unprecedented stress due to a combination of COVID-19 and Hurricane Dorian.

Mr Bowe also revealed he has recommended to the Government that The Bahamas "pack our Georgie bundle" and hold a series of roadshows with investors holding this nation's foreign currency sovereign debt in a bid to eliminate the "information vacuum" he holds responsible for the increased yields/discounts being sought by the market.

Tribune Business reported last week that The Bahamas' sovereign US dollar debt was trading in the secondary markets at deep discounts to the value at which it was issued, with sellers willing to accept anywhere from 17.5 percent to 25.5 percent below this benchmark and buyers wanting reductions of between 21.25 percent to almost 28 percent depending on when the relevant issue matured.

Investors were also seeking returns ranging from 10 percent to a maximum of more than 13 percent due to the perceived greater risk in investing in Bahamian sovereign debt. This stems from the tourism and economic shutdowns produced by COVID-19, combined with the recent Standard & Poor's (S&P) downgrade and the threatened similar action by Moody's.

Arguing that the Government must take action to calm the markets, Mr Bowe said the upcoming Budget also needs to address the maturity profile and repayment strategy associated with direct debt that was projected to hit $8.205bn by end-June 30, 2020, pre-COVID-19.

Warning that full "debt forgiveness is a very dangerous road to travel", the Fidelity chief financial officer said it should instead seek "holidays" on principal repayments coming due within the next three to five years and defer them to a later date to give the economy and the Government's finances time to recover from COVID-19.

Arguing that The Bahamas needed to keep making due interest (debt servicing) payments to investors, Mr Bowe said: "I'd like to see the Government extend the debt maturity profiles of debt coming due in that time.

"I would caution us not to get into full holidays, just the principal. They've done that on some of the club loans they've taken out; the $190m club loan for Dorian that was closed in March. That already had the principal holiday where they would pay interest in the first year only.

"We've had the request to consider a two-year payment holiday to give them breathing room. As long as the cash flow from debt servicing is coming, the principal remains." Fidelity Bank (Bahamas) was part of the commercial bank consortium, led by Royal Bank of Canada (RBC), that together with Scotiabank (Bahamas), Commonwealth Bank and Bank of the Bahamas put together the $190m Dorian loan.

"What that does is it's a little bit of revenue replacement, capital revenue replacement," Mr Bowe explained of loan deferrals. "Some of the debt principal return is taken out of the Budget in the next 12 month cycle without borrowing new money to create some headroom by deferring some of what you're repaying."

Deferring debt principal repayments is an obvious strategy for the Government to turn to as part of a wider approach to limit potentially the greatest fiscal hole it has ever faced. With revenues down 50 percent for March, and possibly even more for April, the Public Treasury is facing potentially a $1bn or greater drop in its income if such trends continue at a time when spending pressures have increased dramatically.

This is because the Government is being asked to both protect Bahamians suffering jobs and income losses as a result of COVID-19, and to stimulate the economic recovery. Given that the Government is projected to spend $708m on debt principal redemption in the 2019-2020 fiscal year, and a further $465m and $430m in 2020-2021 and 2021-2022, respectively, deferring such repayments could free up significant resources.

However, both Mr Turnquest and Marlon Johnson, the Ministry of Finance's acting financial secretary, neither confirmed nor denied the debt deferral plans when contacted by Tribune Business yesterday. The deputy prime minister said: "We have regular conversations with our bondholders and other creditors about any number of issues, and feedback on the economic outlook for the medium and long-term.

"To the extent that these conversations are being held, they are being held with full transparency and are providing information to creditors such that they can make decisions." Mr Turnquest added that the Ministry of Finance's debt management unit was constantly reviewing debt maturities and interest rates to minimise costs to the Bahamian taxpayer from this portfolio, while ensuring the Government is "as consistent as possible" in its strategy.

This was echoed by Mr Johnson. However, Mr Bowe argued that the Government needed to take a more aggressive approach in tackling the volatile trading conditions impacting its foreign currency debt. "I've had conversations with several brokers and holders of our US dollar debt," he told Tribune Business, "and a large contributing factor to the huge discounts is they've not heard anything.

"The only news they've got is tourism is closed, the borders are closed. What I have strongly recommended, and would be willing to participate in, are bondholder briefings. When there's an information vacuum there's uncertainty. I've been strongly recommending to the Government that we pack our Georgie bundle and start having these conferences with investors in the US.

"Following my conversations with them, they left with a very different impression. They didn't have appreciation for our currency peg strategy, and what it is. Without tourism dollars, they were worrying whether we have enough US dollars to pay them back." These fears, Mr Bowe said, did not take into account the measures taken by the Central Bank to prop up the external reserves by restricting outflows.

Meanwhile, COVID-19's fiscal and economic realities have pushed the Government to seek IMF funding even though Mr Turnquest, on March 18 at the start of the pandemic and associated lockdowns/curfews, said this would be a last resort option.

“This loan is not a structural adjustment facility. It does not involve the conditionality elements normally associated with the IMF facilities that most are familiar with. This facility is a low-cost option, with an interest rate of some 1.054 percent that we are smartly availing ourselves to address our current needs,” the deputy prime minister said in a statement.

"This loan facility assists us with meeting our existing obligations through the end of the fiscal year, as has been approved by Parliament during the supplemental Hurricane Dorian exercise.... This particular low-cost facility is a one-time deal that cannot be used again until repaid.

"A simple way to think of this is like borrowing against the value of your ownership in a company. The Bahamas has a quota in the IMF, which can be likened to its ownership of shares in the IMF. Borrowing against these shares is normally at a lower interest rate than borrowing from a commercial source, and therefore a more favourable option for emergencies like the one we face today."

The Government's confirmation of the IMF loan application comes just three days before Mr Turnquest is due to present the 2020-2021 Budget in the House of Assembly on Wednesday, May 27. The announcement is likely intended to get ahead of the Fund confirming the application has been made, and allows the Government to both set the narrative and allay any fears of a "structural adjustment" initiative being imposed.