The Tribune

• Local lending tightening; bond just 40% subscribed

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Top bankers yesterday rejected the Prime Minister’s assertion that they are “betting against The Bahamas’ economy” after it was revealed that a recent bond issue was just 40 percent subscribed.

Kenrick Brathwaite, Bank of The Bahamas’ managing director, denied to Tribune Business that the commercial banks have “lost confidence” in this nation’s economic prospects after the sector came under pressure from the Davis administration to increase its participation in government bond offerings.

The Prime Minister sought to further cajole the industry in unveiling the supplemental Budget in the House of Assembly, arguing that it needs to unleash the $2.4bn in surplus assets available for lending within the commercial banking system to help the private sector grow the economy out of its post-COVID slump.

And he made clear that the Government is looking to the banks, as well as other institutional investors such as insurance companies and pension funds, to reduce its reliance on foreign currency borrowing by drawing on some of this liquidity to finance its domestic Bahamian-dollar bond issues and short-term Treasury bill releases.

“The domestic market has a much larger capacity to support government debt issuances. We need our domestic financial institutions to show faith in the economy by participating significantly in the domestic financial market – and not just to lend money to the Government and its entities, but to make loans to Bahamian firms to allow them to invest and to grow,” the Prime Minister said.

“Domestic financial institutions choosing not to participate in the domestic market are in effect betting against the success of the economy. This economy cannot grow without domestic credit expansion.”

Mr Davis’ comments came after Michael Halkitis, minister of economic affairs, and Simon Wilson, the Ministry of Finance’s financial secretary, met with the commercial banks, investment banks and other institutional money managers and investors on Friday in a bid to cajole them to increase their participation/subscription in the Government’s local capital raising.

In a sign that the Government’s domestic financing sources may be tightening, informed sources who attended the meeting - speaking on condition of anonymity - revealed that the Government’s $30m registered stock offering in August was only 40 percent subscribed, with just $12m taken up.

It is understood that the Central Bank had to pick up the outstanding $18m, and capital markets observers are now watching closely to see how its current $75m Bahamas Registered stock issue - which was due to close yesterday - will fare.

Mr Brathwaite confirmed the meeting between the industry and Messrs Halkitis and Wilson, although he did not go into the figures discussed. “The tone of the meeting was ‘you guys didn’t participate in the last funding round, $30m, because of a lack of confidence in the economy’,” the Bank of The Bahamas chief revealed of the Government’s approach to their encounter.

However, he explained there were multiple other factors impacting the Bahamian banking industry and its appetite for government debt securities besides confidence in the economy. And another industry source put it blunter, stating that the Government’s dire financial position meant there was “an inherent riskiness” associated with investing in its paper.

Mr Brathwaite, though, explained that many commercial banks, including his own, are at or close to their “ceiling” or limits in terms of the amount of government securities they can invest in. These are imposed by regulatory and prudential norms that the banks must comply with or find themselves in serious trouble.

And The Bahamas’ fiscal and economic woes, which have led to multiple sovereign creditworthiness downgrades to so-called ‘junk’ status by Moody’s and Standard & Poor’s (S&P), have already impacted the banks’ income statements and balance sheets.

Commonwealth Bank’s 2020 audited financial statements revealed that 99 percent of its total $458m investments are in government bonds or related investments. Bank of The Bahamas took a $6.3m provisioning hit the same year due to a Moody’s downgrade, while Fidelity Bank (Bahamas) downgraded its government debt holdings to ‘stage 2’ for assessing expected credit loss.

“They [the Government] did not consider sovereign debt and the downgrades to the economy,” Mr Brathwaite said. “That escalated our provisioning. We had a $6m impact to our bottom line because of the sovereign debt. That is a consideration they did not seem to want to appreciate.

“It’s not a lack of confidence; it’s just other things the banks have to consider besides the Government needing money. If we are close to our ceiling, there’s a good chance other banks will be pretty close. Other banks have indicated they have not changed their pattern. They’re participating in every issue, but not to the extent the Government wanted, maybe.

“We now have to be cognisant of provisioning requirements because of the recent downgrade. The message to government or anybody else is: It has nothing to do with confidence in the economy; it has to do with provisioning costs of the downgrade. All these things factor into the decision.

“It has nothing to do with confidence in the economy; that’s such politically loaded. It has to do with all these other things we have to think about. Most of us were a little discouraged by that comment about lack of confidence in the economy.”

Increasingly risk-averse Bahamas-based investors are also shunning the Government’s long-term paper, preferring three years or less, despite Mr Davis revealing that Messrs Halkitis and Wilson have been tasked to “carry the message that the risk of default is non-existent”.

Mr Brathwaite said the Government and National Insurance Board (NIB), as well as many private businesses, had during the COVID-19 pandemic’s peak increasingly placed funds in short-term deposits. This, in turn, threatened to create asset and liability matching problems for banks investing in long-term paper.

Another financial industry source, speaking on condition of anonymity, said: “There’s an inherent riskiness to government debt at the moment. They tried to raise $30m, and only got $12m, and and the other $18m had to be placed with the Central Bank.”

They added that the Government’s message at Friday’s meeting was “if you don’t start participating we’re going to have a short-term problem” Describing this as the equivalent of a “Hail Mary”, they added of the Government: “Why are you hitting the banks for not participating when you guys are in a hole? They’re desperately in need of money.

“There are no plans for new taxes, you’re cutting VAT and still saying give us money. It’s like a mortgage borrower defaulting on their loan and going to the bank saying they need more money when they are about to go on holiday. If you are a responsible government you put in place policies that make people feel more comfortable, and they’re not.”

Mr Davis yesterday hit out at the Minnis administration for “changing the structure of The Bahamas’ debt profile” by borrowing heavily in US dollars during the COVID-19 pandemic rather than tapping into the domestic market’s surplus liquidity.

“Despite billions of Bahamian dollars sitting in banks, the former administration opted to borrow approximately $2bn, or 64 percent of all government borrowings, in foreign currency loans over the recent fiscal year,” he said.

“Unfortunately, with visibly poor fiscal management, confidence in the Bahamian government weakened in international markets and our Government bonds are trading at distressed levels, five notches below the level indicated by our credit ratings. That has resulted in an increased burden of interest payments on our debt.”