The Tribune

• Top official ‘confident’ on cheaper interest rates

• Move to ‘rebalance’ borrowing with $892m local

• ‘Sufficient room for uptake’ among local investors

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Ministry of Finance’s top official yesterday voiced optimism that the government’s $1.851bn borrowing this fiscal year will come at a lower cost to the Bahamian people based on “market soundings”.

Marlon Johnson, acting financial secretary, told Tribune Business that yield curves on existing government debt were already falling to levels more in line with historical trends as investor sentiment towards The Bahamas improves with the economy’s “reflating”.

He added that the government was also moving to “rebalance” its debt financing during the 2021-2022 fiscal year, with 51.8 percent ($959.2m) of its needs slated to come from foreign currency and the remaining 48.2 percent or $892.4m sourced in the local capital markets.

Asked whether there was sufficient appetite for long-term paper, given that institutional investors are increasingly gravitating towards short-term bonds due to the increased risk surrounding the government as a result of Hurricane Dorian, COVID-19 and multiple credit rating downgrades, Mr Johnson conceded it was “a mixed bag”.

However, he argued that the government was still receiving requests from institutions such as banks and insurance companies who are seeking long-term maturities to match liabilities of a similar duration.

And Mr Johnson said the administration had received sufficient indications to indicate “there’s sufficient room for uptake” of government securities generally among Bahamian investors, even though there were signs some institutions may be approaching their regulatory limits in terms of the amount of such debt they can carry on their balance sheets.

He pointed to the $2.3bn in surplus commercial banking sector liquidity at end-May 2021, and the increasing participation of retail investors in secondary market trading of government bonds on the Bahamas International Securities Exchange (BISX), as signs that capital can be readily deployed.

He spoke as the government unveiled its “approved borrowing plan” for 2021-2022, which now has to be released within 14 days of the budget’s passing under the newly-implemented Public Debt Management Act. Given that the budget was passed on June 24, the Ministry of Finance’s release of the plan came on deadline day.

Of the $1.851bn to be borrowed, some $951.8m will cover the projected fiscal deficit that will be incurred over the next 12 months. That represents new debt that will be added to The Bahamas’ national debt, while the remaining $899.7m will be used to refinance and pay off debt principal as it matures. Given that this is repaying existing debt, the $899.7m will not be added to the national debt.

“The Government will continue to pursue a judicious mix of domestic and foreign currency borrowing initiatives,” the plan said. “The fiscal year 2021-2022 borrowing plan contemplates a domestic environment in which liquidity conditions remain favourable and provide stable opportunities for the Government to refinance and increment both short and long-term Bahamian Dollar security issuances in the market.

“Given the scale of the budgetary financing required, and the observed absorption constraints in the domestic market, the government will continue to leverage foreign currency borrowing opportunities, although not with the explicit strategic objective of supporting the countries’ external reserves. Fund raising activities will be arranged to ensure the adequacy of the Government’s cash flow to meet liabilities in a timely manner.”

Explaining the break down between domestic and foreign-sourced debt, the plan said: “Approximately $892.4m (48.2 percent) of borrowing needs will be sourced in Bahamian dollars, and the remaining $959.2m (51.8 percent) in foreign currency.

“However, the Government will continue to surveil domestic market conditions and investor sentiment, in a bid to capitalise on opportunities for achieving a greater proportion of the financing from domestic sources.”

It continued: “Of the $959.2m proposed in foreign currency borrowings, $700m or 73 percent is to be derived from the international capital markets, representing the bulk of the overall financing at 37.8 percent.

“Loan funding, at $372.4m, will constitute 20.1 percent of the aggregate financing requirement, with nearly 64.5 percent to be sourced from potential international financial institution (IFI) financing, inclusive of budgeted loan drawings.”

Mr Johnson told Tribune Business that the Government was seeking a more even balance between foreign and domestic debt financing this fiscal year because the need to support the foreign currency reserves, and the one:one exchange rate peg with the US dollar, had eased with tourism’s re-opening and the start of the wider economy’s reflating post-COVID.

“Last year we were in a situation where the economy had contracted substantially, and the plan articulated by the-then deputy prime minister was to lean more on the foreign market to shore up the foreign reserves,” he explained.

“Most people would have assessed that that plan worked well because the reserves stayed high throughout the pandemic ($2.38bn at end-May 2021). With the economy reflating and starting to move back to more normal activity, it gives the Government an opportunity to rebalance its financing.

“In light of the fact we have a more robust Bahamian economy at the present time, and which is strongly in reflation mode, that means we anticipate that the borrowing will be more in Bahamian dollars in upcoming years assuming we have a normal economic trajectory and no more external shocks.”

Observers have voiced concerns that last year’s foreign currency borrowing will impose a heavy repayment on capital inflows in future years, especially since The Bahamas placed a $600m sovereign bond issue at the peak of the COVID crisis at an 8.95 percent interest coupon.

This is far higher than its traditional level of around 6 percent, and has potentially imposed hundreds of millions of dollars in extra interest costs on taxpayers over the bond’s 12-year lifetime.

Mr Johnson, though, voiced optimism that the Government will pay much lower debt servicing costs on its foreign currency borrowings in 2021-2022, saying that yield curves - measuring the returns investors are seeking - on The Bahamas’ existing debt had fallen to around 6.5 percent to 6.75 percent when he last checked.

This newspaper was unable to corroborate that before press time last night, but the acting financial secretary said: “If you see which way our bonds are currently trading, you’re starting to see them move back towards yields more typical of prior years, which is emblematic that in the secondary market investor sentiment is more favourable to The Bahamas and that is reflected in the yield curves.

“There’s a movement of interest rates in our favour. What I can say at this stage is that we anticipate we will be able to certainly improve on the interest rates we saw last year at the height of the crisis, reflecting what we anticipate is improved investor sentiment towards The Bahamas and the fact the economy is rebounding healthily.

“For reasons I think everybody understands, last year the risk profile of the country was in a much different place because of the impact of COVID-19 and what it meant for future years,” Mr Johnson continued. 

“Fortunately for The Bahamas, because the economy has been reflating and the move to recovery has been pronounced, this has bolstered the prospects of the country going forward and you will see that reflected in the interest rates that the country gets in the open market. We feel confident based on the soundings we are getting from the marketplace.”

The Government is also seeking a $200m Inter-American Development Bank (IDB) guarantee for its proposed $700m foreign currency bond issue during the first half of the 2021-2022 fiscal year, again with the aim of obtaining more favourable terms and interest rates. The latter will be fixed.

“Of the proposed $259.2m in foreign currency loans, US$19m is to be sourced from a commercial bank, leveraging a multilateral guarantee, which will enable the Government to secure more favourable pricing,” the plan said. “The Government also intends to seek funding from an international financial institution in the amount of $160m, which is proposed for the second half of the fiscal year.”

The remaining $80m is to come from the draw down of loans from the IDB and Caribbean Development Bank (CDB).