The Tribune

• Top banker urges: ‘Tread very carefully’

• Warns don’t ‘balloon’ spend for election

• National debt jumps $1.3bn in nine months

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The government was yesterday urged to “tread very cautiously” because banks and other institutions are at “the border line” of incurring credit losses on their holdings of its bond debt.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business the Minnis administration’s fiscal actions could have a significant impact on bank, pension fund and insurance company incomes and balance sheets as a result of the multiple credit rating downgrades The Bahamas has suffered from Moody’s and Standard & Poor’s (S&P).

Revealing that his BISX-listed institution has already downgraded its government debt holdings from “stage one” to so-called “stage two”, he warned that any pre-election spending binges or other imprudent moves could force his bank and others to take what he termed “a paper loss” by writing down the value of these investments to comply with International Financial Reporting Standards (IFRS).

Warning that “there is a lot at stake”, Mr Bowe said Fidelity Bank (Bahamas) had effectively given the government’s fiscal policies “a thumb’s up” by converting some of its cash holdings into one-year bonds.

Yet he warned that The Bahamas’ downgrade to non-investment grade or ‘junk’ status meant that the Minnis administration needed to be especially prudent, notwithstanding this nation’s so far “excellent record” of repaying investors, if it wanted to retain their confidence and ensure ready domestic and foreign appetite for its bonds remains amid elevated post-COVID financing needs.

“The government has to tread very cautiously because non-investment grade status does trigger a couple of issues,” Mr Bowe explained to this newspaper. “Up to the end of 2020, we calculated the expected credit loss [on our government debt holdings], and it was not material enough, but it was border-lining.

“It is an accounting treatment; it is not an actual loss, but based on our credit rating there is a possibility of default, so the government has to balance - in the domestic and international markets - the actions it has to take. 

“They have to be careful that they are not ballooning debt, which is a risk in an election year, and they have to show they are careful in planning expenditure but not at the expense of capital growth.”

Fidelity Bank (Bahamas) just-released 2020 audited financial statements highlight the growing risk presented by The Bahamas’ current “junk” creditworthiness, revealing: “Investment securities with credit risk principally comprise debt securities issued by the Government of the Commonwealth of The Bahamas, which were downgraded to non- investment grade credit ratings during the year, resulting in all securities acquired prior to the downgrade being classified to ‘Stage 2’ for purposes of assessing expected credit loss’.

And Fidelity Bank (Bahamas) is far from alone in this. Fellow BISX-listed institution, Bank of The Bahamas, was forced to take a $6.3m provisioning hit by the Moody’s ‘junk’ downgrade of the Government in its financial results for the year to end-June 2020.

The likes of banks, insurance companies and pension funds carry significant holdings of government bonds and other debt securities. They have traditionally been seen as The Bahamas’ safest, most liquid form of debt securities, retaining 100 percent of their face value on balance sheets.

However, the Government’s post-COVID and Dorian fiscal woes are endangering this and, with IFRS now requiring institutions to make forward-looking assessments of credit risks, the possibility that write-downs or discounts may need to be applied to these holdings is being considered for the first time.

“While there is confidence in their debt, that could change if we continue to see negative outlooks from the rating agencies because that will continue to cause the potential for downgrades, which will have the knock-on effect of increased credit losses based on the mechanisms we have to deploy,” Mr Bowe explained.

“To avoid that, the Government needs to make sure the plans it is putting forward are credible policies. It is not a story for the rating agencies. If we do a good job satisfying ourselves then there is a knock-on effect. We have no real need to create a story for them. We need to create a story for The Bahamas and live by it. There is a lot at stake.

“The actions they take may not have consequences for entities purchasing the bonds because the Government has an excellent record of paying, but they have an impact because of the fact forward-looking information has to be taken into account,” he added.

“The fact we’ve moved from investment grade to non-investment grade has to be taken into account, and any further deterioration will have an effect in terms of credit losses.” He described the situation as “a partnership in many ways” where the Government needed to maintain market confidence while also ensuring that existing debt holders did not have to incur writedowns.

Marlon Johnson, the Ministry of Finance’s acting financial secretary, told Tribune Business that the recently-passed suite of public financial and debt management legislation would give existing and potential investors access to greater transparency and insight into the government’s fiscal plans.

“All current and prospective investors can have a good understanding of the Government’s near and medium-term liabilities, and help them assess the credit risk,” he said. “From an investor standpoint, the coming into effect of that legislation and how it evolves will continue to inform the confidence and credibility they have in The Bahamas.”

Meanwhile, the Ministry of Finance’s so-called “fiscal snapshot” for the first nine months of the 2020-2021 fiscal year, yesterday revealed that the Government’s direct debt has increased by $1.312bn over that period to total more than $9.5bn. The debt-to-GDP ratio, as result, has risen by almost 17 percentage points.

“As a result of net borrowing activities, the direct charge on the Government – exclusive of interest rate adjustments - increased by $1.312bn to $9.503bn or 82.8 percent of GDP at end-March 2021, as compared to 66 percent of GDP at end-June 2020,” the report said.

“In meeting its operational requirements, the Government incurred a $1.312bn net increase for the review period. Budgetary financing requirements were met through gross borrowings of $2.393bn compared to $936.5m in the same period of the prior fiscal year.”