The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas would save $59m per year via a $200m guarantee from the Inter-American Development Bank (IDB) to underwrite a proposed foreign currency bond issue, it has been asserted.

The IDB, detailing plans left by the former Minnis administration, said its guarantee would help mobilise “more than three” times that amount of capital for the Government via a $700m-$850m raise that was originally scheduled to occur in September/October last year.

However, the Davis administration subsequently deferred the planned US$ bond until the second half of the 2021-2022 fiscal year upon taking office. And Simon Wilson, the Ministry of Finance’s financial secretary, later told this newspaper that proceeding with the proposed issue will hinge on international capital market conditions becoming more favourable.

That is now unlikely amid expectations that the Federal Reserve will hike US interest rates in a bid to dampen down inflation, which means The Bahamas - and its taxpayers - will have to pay higher debt servicing costs on new foreign currency bonds as well as rollovers of existing debt issues as they mature.

The IDB’s $200m guarantee was linked to The Bahamas’ efforts to make the necessary reforms that would unleash the so-called Blue Economy as a key component of its post-COVID revival. “The sovereign guarantee structure will provide important economic and financial benefits to the Government of The Bahamas,” the IDB said.

“First, it is expected that a mobilisation of more than four times’ the maximum guaranteed amount [will occur]. Second, the expected savings for The Bahamas using the IDB sovereign guarantee (compared with a scenario of using a standalone non-guaranteed bond) are estimated at 96 basis points, which implies annual savings of $59m in net present value terms.”

Such savings would equate to an interest coupon that would be almost one percentage point higher than without the IDB’s sovereign guarantee, according to the paper. “The maximum guaranteed amount will be up to $200m to be financed from the ordinary capital resources of the bank,” it added.

“The amount has been determined considering the country’s broad need for fiscal resources. The public sector’s financial requirements for fiscal year 2021-2022 are estimated at $1.8bn, and external financing for 2022 at $2.2bn.

“This operation represents 11.4 percent and 8.9 percent of those requirements, respectively. However, the guarantee has the potential of having a multiplier effect of more than three times’. If, as expected, the IDB guarantee mobilises resources for more than three times’ its amount, then the overall financing supported by this operation will represent 39.8 percent and 31.1 percent of the requirements mentioned above, respectively.”

The figures underpinning these assumptions are likely to have altered since the Davis administration took office. “The guarantee is expected to mobilise more than three times’ the maximum guaranteed amount and support a sovereign bond issuance between $700m and $850m,” the IDB added.

“To improve the overall debt profile of the Government, the tenor is expected to be aligned with the maximum weighted average life of the sovereign guaranteed policy (12.75 years)..... This financial structure could generate a superior combination of resource mobilisation, cost reduction and adaptation to the Government of The Bahamas’ financial needs.”