The Tribune

• Bahamas must make ‘tough decisions’ by itself

• Price, yields still sliding despite $385m success

• Suggestions some bond investors want IMF

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas must “put our money where our mouth is” and prove to global investors why it will not require an International Monetary Fund (IMF) programme to escape its economic and fiscal woes, a top banker said yesterday.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business the country must show the ability to make “the tough decisions” by itself amid reports that some participants in the world bond markets have been urging the Government to seek IMF financial assistance as a means to create a “policy anchor” for fiscal and economic turnaround.

Warning that The Bahamas is “facing a tornado” due to increasingly unfavourable economic and capital market conditions internationally, he added that the Government and its advisors will have to become “more innovative” to both maintain access to debt financing and keep debt servicing (interest) costs for taxpayers at manageable levels.

Mr Bowe, who headed the Coalition for Responsible Taxation (CRT) when VAT was implemented in January 2015, spoke after an article by Global Capital, an online news site that has covered the global markets for three decades, yesterday sparked much interest in Bahamian financial, business and political circles by voicing concerns over this nation’s just-placed $385m bond offering and its wider fiscal and economic condition.

Data from the Frankfurt Stock Exchange shows that discounts and yields on existing and listed Bahamas government debt issues had continued to trend south despite the successful $385m bond offering. The $825m bond, placed at 8.95 percent at the height of the COVID-19 pandemic’s fall-out, is now trading at a near-29 percent discount to face value and a 14.9431 percent yield. Both indicators have deteriorated, indicating investors are pricing in increased risk.

The $300m bond placed prior to that at 6.95 percent, before both Hurricane Dorian and COVID-19, was showing better stability at a 26 percent discount to face value and 12.8097 percent yield. However, sources said the signals from both listed bond issues suggest many in the global capital markets see The Bahamas as a “default risk down the road” as the $385m bond’s placing should have caused “a bump” in the other direction.

Besides suggesting that the bond’s two-tranche structure was “overly-complicated” and confusing, even though it enjoyed backing from a $200m Inter-American Development Bank (IDB) guarantee (see other story on Page 1B), the article also voiced concerns that the Davis administration’s fiscal turnaround strategy was based on “hope” with unrealistic revenue and gross domestic product (GDP) growth projections that are unlikely to be achieved.

And, finally, the piece suggested that some bond market players have been urging the Government to enter into an IMF financial assistance programme so as to provide a “policy anchor” for the fiscal reforms that are required. Describing The Bahamas’ financing needs as significant, capital markets players said this nation was resistant to approaching the IMF because it would mean new and/or increased taxes, spending cuts and likely public sector lay-offs.

Kate Moreton, emerging market fixed income analyst at Columbia Threadneedle Investments, was quoted as saying: “I think there is a willingness to pay in The Bahamas, but they are struggling fiscally. At the moment they are trying to fix that in-house, and have several ideas of how they might look to raise revenue, but the tough thing is that it relies on growth. Also, as an importer of basically everything, they are dealing with severe inflation.”

She described IMF support as the “ideal position” for foreign investors holding Bahamian debt, but added: “They are afraid of the social repercussions [of a programme].” And with good reason, due to the likely consequences. However, the widely-circulated article appeared to strike a chord with Bahamians spoken to by Tribune Business yesterday as it aligned with many of the fears they harbour about the country’s economic and fiscal position.

Senator Michael Halkitis, minister of economic affairs, appeared to largely dismiss the concerns raised by the article in a messaged response to this newspaper. Noting that it was published at close to 10pm on Thursday, June 9, prior to the results of The Bahamas’ “oversubscribed” $385m bond offering being released, he asked: “Did you see the results of the offering?”

Simon Wilson, the Ministry of Finance’s financial secretary, could not be reached for comment via phone or message. Both he and Mr Halkitis, since the Davis administration took office last September, have repeatedly hammered the message to investors that The Bahamas has never defaulted on its debt repayment obligations and has no intention of doing so despite a national debt that stood at $11.843bn at end-March 2022.

However, Mr Bowe yesterday argued that The Bahamas must prove to the international markets that it has “the capacity” not to require IMF assistance and can resolve its fiscal headaches through its own actions. This, he added, has to be demonstrated beyond the annual Budget and Fiscal Strategy Report via a medium and long-term consolidation plan with multiple realistic targets, which can easily be measures to show The Bahamas is hitting them.

“I think with that one, every time we take the position we won’t come into an IMF programme, I go back to the Bahamian saying: ‘Mouth can say anything’,” Mr Bowe told Tribune Business. “We have to put our money where our mouth is and demonstrate why we will not be there. 

“The very short-term targets we set out in the Budget and Fiscal Strategy Report don’t back up ‘hard mouth’, as Bahamians say, on the issue of an IMF programme. But bond holders would say: ‘Get the IMF in’. It protects them. We have to recognise they have select interests.

“If we want to be independent of that, we have to demonstrate the capacity to do so. Notwithstanding Jamaica went into an IMF programme, all the tough decisions were made by the Government and people themselves. The Bahamas can make the same tough decisions without being in an IMF programme, and demonstrate hard mouth and that it is not mouth saying anything, but that money really buys land.”

Mr Bowe agreed with the Global Capital article that The Bahamas is disadvantaged by its non-appearance in indices such as the JP Morgan emerging markets bond index (EMBI), which would create a floor for its bond yields by enabling better comparisons with developing country peers.

Mr Wilson, too, has made similar comments and said The Bahamas needs to increase the size of its bond issues to make them more attractive to a larger pool of investors. “We sit in no man’s land,” Mr Bowe told Tribune Business. “One of the major holders of our bonds, who has conversations with me from time to time, indicated we are hurt by that.

“We tend to be viewed as a developed country so our credit is compared to developed countries rather than compared to peers in developing markets. Sometimes we don’t put ourselves in position to market ourselves to the best of our ability. Ultimately, we need to make sure we put ourselves in the most advantageous position.”

One source, speaking on condition of anonymity, took a dimmer view. With listed Bahamas government debt continuing to trend downwards on global stock markets, they said of the $385m bond: “The markets don’t see this as a sign of fiscal stability. They see it as one-off activity, and not a sustained fiscal recovery, without commitment to broad fiscal reform to explain what we’re doing on the revenue and expenditure side.

“The Government is increasing expenditure without explanation. What the markets are working on is the assumption that we are a default risk down the road. They are more comfortable with us going into an IMF programme as that will impose the discipline required. They still have tough sledding ahead.” 

However, The Bahamas still has several cards and tools in its arsenal that can be deployed before the risk of a debt default looms large. The annual Budget, and much of the fiscal focus to-date, has been on the Government’s equivalent of an ‘income statement’, which reflects its projected annual revenues (tax and non-tax) and both recurrent and capital spending.

This, though, does not give any insight into the Government’s balance sheet in the absence of accrual-based accounting. This is where its assets and liabilities would be listed, and it can still leverage its Crown Land holdings and entities such as state-owned enterprises (SOEs) should the need arise, although a so-called ‘fire sale’ of public assets in a fiscal emergency would not be the desired outcome.