The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas’ national debt is forecast to peak at $11.2bn in the 2023-2024 fiscal year, it was revealed last night, and return to the legally-required 50 percent of GDP threshold by the next decade.

The Government’s 2021 Fiscal Strategy Report, released not long before midnight, forecast that the country’s debt will hit $10.8bn by end-June 2022. This represents a sum equivalent to 93.3 percent of gross domestic product (GDP) or economic output, and is a slight decline on the 100 percent ratio that was achieved at the same time in 2021.

“In line with the projected overall balance, the nominal debt level is expected to increase in fiscal year 2021-2022 to approximately $10.8bn or 93.3 percent of GDP, a decline from the 100.4 percent experienced during the most recent fiscal year,” the report said.

“Debt levels are anticipated to peak at $11.2bn in fiscal year 2023-2024 before declining to $10.8bn or 74.1 percent of GDP by fiscal year 2025-2026. Based on the current fiscal trajectory, inclusive of revenue enhancement and expenditure containment plans, the Government anticipates maintaining achievement of its 50 percent debt target in 2030-2031.

“This is predicated on the assumption that the accumulation of primary surpluses in the intervening years would reduce the need for borrowing.” The 50 percent debt-to-GDP ratio is a target mandated by the Fiscal Responsibility Act, but the Government has secured a waiver from this benchmark due to the debt blow-out produced by COVID-19 and Hurricane Dorian.

Meanwhile, the Government’s first-ever medium-term debt strategy report, released alongside the Fiscal Strategy Report, revealed that its borrowing over the next three fiscal years to 2024-2025 will be weighted to the domestic market.

“The financing mix under the selected fiscal year 2022-2023 to fiscal year 2024-2025 medium-term debt management strategy will include 41 percent of net borrowing from foreign sources and 59 percent of the financing from domestic sources. However, in terms of gross financing, the foreign/domestic financing mix will be 28 percent and 72 percent, respectively,” the report said.

The Government added that it was seeking to broaden the domestic market for its debt by increasing investor participation beyond the commercial banks, insurance companies, pension funds and other institutions that tend to dominate it.

“Traditionally, the domestic bond market is the main source of financing for the fiscal deficit, although it is not developed nor deep enough to fully support Government budgetary requirements in all market conditions,” the report said.

“During fiscal year 2020-2021, and into the current fiscal year, the pre-existing vulnerabilities of the domestic market were exposed, as macroeconomic conditions became more challenging and the Government’s borrowing needs were enlarged.

“Given the rather narrow investor base and limited absorptive capacity of the domestic market, the Government was constrained to increase reliance on external funding to meet the gap, reduce concentration risks in the domestic market and to support external stability, given the adverse impact of COVID-19 on tourism inflows,” it added.

“The development of the bond market remains a strategic objective of the Government, from the perspective of broadening investor participation, limiting foreign exchange risk in the debt portfolio and establishing a yield curve that serves as a reference for access to financing for private and other public sector initiatives.”

Turning to the actual steps the Government will take, the report added: “The Government will continue to foster the development of the domestic market with increased focus on liquidity, transparency, secondary market trading, settlement mechanisms and investor diversification.

“In this context, several important plans underway include the introduction of an online auction for the BISX broker/dealers and commercial banks, and the concurrent carve out of a non-competitive bidding scheme for small, individual investors in government bonds to bring greater cost and administrative efficiency to the issuance process.”

Elsewhere, the medium-term debt management strategy report said the Government’s bond portfolio is vulnerable to higher interest and refinancing costs whenever an issue is rolled over.

“Rollover/refinancing risk shows the vulnerability of the portfolio to higher refinancing costs for maturing debt obligations within a specified period or, in extreme cases, the inability to rollover the debt,” the report said. “Refinancing risk is a key risk in government’s existing debt portfolio, with the average time to maturity (ATM) placed at 7.3 years at end-September 2021.

“Given the short-term nature of the Treasury bills and notes, refinancing risk was skewed towards the domestic portfolio, which had an ATM of 7.5 years and 34.3 percent of the portfolio maturing within one year.

“Refinancing risk of the foreign debt revealed an ATM of seven years at end-September 2021, reflecting the characteristics of a portfolio more concentrated in instruments with commercial relative to concessionary terms. Only 7.7 percent of the foreign debt portfolio is maturing within one year, providing the Government with time to develop and execute refinancing initiatives.”