The Tribune

By YOURI KEMP

Tribune Business Reporter

ykemp@tribunemedia.net

The deputy prime minister yesterday indicated the Government will be forced to take "more direct" measures if tourism and foreign exchange inflows do not significantly rebound during the 2021 first half.

K Peter Turnquest, addressing the Bahamas Institute of Chartered Accountants' (BICA) accountants week seminar series via a webinar, did not explicitly detail what fiscal and/or economic actions the Government might have to take, or if this would require extra borrowing beyond the net $1.334bn approved by Parliament following the May Budget.

He said: “If the foreign exchange economy does not turn around in the first quarter or second next year, then I think we are going to have some challenges that we will have to address more directly. But in terms of borrowing, we would have successfully accessed the capital markets for $600m, which was oversubscribed with about $1.3bn worth of interest.”

Mr Turnquest conceded that the 8.95 percent interest rate attached to The Bahamas' $600m foreign currency bond issue was "much higher than we would have wanted it to be", but argued that this merely reflected market realities due to the COVID-19 pandemic and the country's already-reduced creditworthiness following repeated downgrades by the rating agencies.

“Unfortunately, where we were in terms of the markets at the time, and given the fundamental risk for jurisdictions like ours, which is very heavily tourism dependent, our interest rates have been much higher than we would have wanted it to be," the deputy prime minister added.

"But it reflects the market. The price is where it is, and while the markets may give us tremendous credit for our stewardship over the last several years and the reforms we put in place, and the programme that we have with respect to public procurement - all of these programmes we have - it still has us at a much higher rate than we would be able to access in ordinary times. Those are just the realities.”

Previous Tribune Business calculations suggested that, at 8.95 percent, the Government - via Bahamian taxpayers - will be paying close to an extra $20m per year to service this latest bond's annual interest costs when compared to the 6 percent rate obtained on the last such issue in November 2107.

Over the 12-year bond's lifetime, this adds up to more than $200m in extra debt servicing costs, although the Government will doubtless be hoping to refinance at much lower interest rates in the intervening years if market circumstances permit. Otherwise the total interest bill will likely equal the $600m bond principal that has to be repaid, thereby taking the total burden to $1.2bn.

“We want to be careful that we do not over-extend ourselves into the international markets at this time," Mr Turnquest added, "because those rates would burden our current budget for several years to come, as well as set us up for a situation that’s unsustainable in the long term. So we want to manage that international exposure as best we can.

“We did go out a little bit heavier than we normally would to the international market this year, again trying to make sure we support the currency peg in the event something seriously bad happens, and that’s why the majority of this year’s budget has been accessed from the [foreign] capital markets.

“We do anticipate that we will have additional borrowings in the New Year to complete our borrowing plan for this fiscal year. I think it’s about 24 percent left on the $1.3bn that we have approved from our borrowing plan from Parliament, so the bulk of that will be sourced from the domestic economy in Bahamian dollars at better rates.”

Mr Turnquest reaffirmed the Government's present projections that it will have to borrow around $800m (actual forecast is for $813.6m) in the 2021-2022 budget, "but then again it all depends on the turnaround of the economy. Once we can see the economy starting to pick up we will do some further contractions in terms of government spending to try to get us back to our fiscal targets".

He added: "In this environment, the need to finance these critical expenditures led to expected increases in borrowings as the Government tapped into both the foreign and domestic markets – taking advantage of the most favourable rates and terms offered by multilateral and other international financial partners given the current global financial realities.

"At the end of the day, the Government has a clear mission to not only address the ongoing crisis but to approach its response in a way that positions the country better for the future. In other words, allocating resources in ways that would both mitigate the potential damage to income and employment in the country while ensuring we are able to recover stronger, more resilient and more resistant to future large-scale economic shocks."