The Tribune

• Bahamas named among 19 who may struggle to repay

• Opposition raises ‘credibility’ worry on Gov’t fiscal plan

• Both sides warned: ‘Don’t dance on the country’s grave’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas must slash its $11.843bn national debt in “absolute” terms, a top banker urged yesterday, after this nation was named among ten countries whose bonds are now trading at “distressed” levels.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business the Government is always “over-jubilant” when the debt-to-GDP ratio falls but is focusing on the wrong target. He spoke out as The Bahamas was reported by Bloomberg News to be among 19 “emerging markets” who may eventually struggle to repay their debts based on current prices (discounts) and yields demanded by investors.

The Bahamas was among ten nations identified as falling into this “distressed territory” since the beginning of 2022 based on Bloomberg’s qualifying criteria, which is that their outstanding US dollar bonds are trading at a risk premium greater than 1,000 basis points (10 percentage points) above US Treasuries, which represent the benchmark upon which all emerging market debt is priced.

Of the ten, The Bahamas was shown as having the sixth greatest spread at 1,065 basis points. The five ahead of it are war-torn Ukraine, Belarus, the Maldives, Tajikistan and Pakistan, with Kenya, Ecuador, Nigeria and Egypt making up the remainder. None of the other nine can be described as economic powerhouses, although Ukraine’s current circumstances are exceptional due to Russia’s invasion.

The Government’s political opponents seized on the Bloomberg report, published on Wednesday, as a signal that international investors and the capital markets “have no confidence” in the Davis administration’s fiscal and economic revival plans. Suggesting the interest rate spreads on The Bahamas’ debt further highlight the Government’s lack of credibility, it reiterated the differences between the Budget forecast and Fiscal Strategy Report projections from just five months ago.

However, Mr Bowe warned both the Government and Free National Movement (FNM) against “dancing on your opponent’s grave” when it came to The Bahamas’ fiscal crisis, as in doing so they were really “dancing on the grave of the country”.

And he reiterated that the present deterioration of The Bahamas’ creditworthiness, and build-up of an $11.843bn national debt, could not be blamed solely on a Davis administration which has been in office for just nine-and-a-half months. Responsibility, Mr Bowe reminded, lay with successive PLP and FNM administrations including the Minnis government that many current Opposition MPs were part of as Cabinet ministers.

Still, Kwasi Thompson, former minister of state for finance in that administration, warned that international investor confidence in The Bahamas will not improve unless the Government unveils a credible fiscal consolidation plan. “According to the metric employed by Bloomberg, The Bahamas is ranked the sixth-worst fiscally distressed emerging market economy,” he blasted in a statement, asserting that this raised “serious concerns”.

He added: “The significant risk premium attached to The Bahamas’ bonds in the international bond market, which as of today was trading 32 percent below par value in the 2032 series, has been trending sharply downward over the last six months. 

“Despite the pronouncements of the Davis administration and their rosy economic and financial prognosis, the community of bond investors are heavily discounting the country’s bonds and, as such, they are signalling in their actions that they have no confidence in the announced plans of the Government to move the country toward fiscal stability.”

Research by Tribune Business, using data from the Frankfurt Stock Exchange, confirmed Mr Thompson’s assertion that the “2032 series”, representing the $825m in Bahamian foreign currency bonds placed at the height of the COVID-19 pandemic, are indeed trading at an almost-32 percent discount to face value. And their yield has increased further to 15.7121 percent.

As for the $300m “series 2029” bonds, they have shown the slimmest of improvements but are still trading at over a 27 percent discount to their face value. The yield also remains in double digits at 13.1778 percent.

Michael Halkitis, minister of economic affairs, did not respond to Tribune Business efforts to obtain comment while Simon Wilson, the Ministry of Finance’s financial secretary, could not be reached before press time. However, the Government will likely point to its recently-oversubscribed $385m foreign currency bond issue as a sign that The Bahamas still retains international investor and market confidence.

However, the Government was only able to access the markets at relatively competitive rates thanks to the Inter-American Development Bank’s (IDB) $200m guarantee, which underwrote one portion of the issue. One financial source, speaking on condition of anonymity, said of the other nine “distressed” emerging markets: “That’s not good company to be in.

“On that pace, it indicates that the global investment community is not buying the Government’s fiscal plans, and that’s reflected in why our spreads are so large against US Treasuries. It’s just reflective of the fact the investment community doesn’t have confidence that the Government is putting a workable plan in place.”

The 2022-2023 Budget relies heavily on a reflating post-COVID economy to drive VAT collections via growth, together with improved enforcement, compliance and administration that will ensure all due taxes are collected. However, the source said investors, creditors and lenders will likely have taken a negative view of the Government’s failure to implement new and/or increased taxes when it has the capacity to do so or curtail spending in line with its Fiscal Strategy Report.

The latter report, issued at end-January 2022, forecast that the Government’s recurrent spending for 2022-2023 will come in at $2.679bn with total spending (including that on capital projects) standing at $3.115bn. Yet in the actual Budget, brought to Parliament just four months later, recurrent spending had increased by more than $300m to $2.997bn while total spending was over $250m higher at $3.368bn.

“When you ignore your own plan, the signal you are sending is is that it was a paper exercise,” the source said. “You cannot say something in January and come back with something different in May unless something substantial happens. The market has recognised that, and that’s why we’re ending up in this bad company. 

“I’m hoping this wakes them up to the fact you cannot flam the markets. You cannot flam your way out of this. You have to stick to your plan and demonstrate a consistent story.” Mr Bowe, meanwhile, told Tribune Business that The Bahamas “must take note” of the Bloomberg report and its findings, given the credibility of the sources, and said it warranted a formal response from the Government.

While The Bahamas’ credit risk premium had undoubtedly increased, due to the deterioration in the country’s creditworthiness as a result of persistent nine-figures deficits even before Hurricane Dorian and COVID-19 struck, and a multi-billion dollar debt accumulation, Mr Bowe said other factors are also in play.

He pointed out that The Bahamas’ outstanding debt was also being discounted by investors because much of it was issued at fixed interest rates. These coupons do not change, even in the event of recent US interest rate hikes, and as a result the spread with US Treasuries is narrowing. As a result, investors believe they are not being adequately compensated for the risk involved.

“While our debt-to-GDP ratio is improving, it’s not improving because of the reduction in debt. It’s improving because of the increase in GDP,” Mr Bowe told Tribune Business, in a nod to the post-COVID reflation. “We have to look at the debt in absolute numbers, not relative numbers.

“The Government, to me, is always over-jubilant when those ratios improve, not because of a reduction in the debt but because of the increase in GDP. We need to focus on a debt reduction strategy, not a debt-to-GDP increase.” An additional $251.4m in borrowing will raise the 2021-2022 fiscal deficit to $758.6m, a sum equivalent to 6 percent of Bahamian gross domestic product (GDP).

When this is added to the $564m deficit forecast for the upcoming 2022-2023 fiscal year, and those incurred during the two years covered by Hurricane Dorian and the COVID-19 pandemic, The Bahamas will have added $3.47bn to its national debt in just four years.

“I always caution the current government and Opposition not to let it be seen that you are dancing on the grave of your political opponent, because the reality is you are dancing on the grave of your country,” Mr Bowe said on relation to the national debt. “We need to be more mature”.

Calling on both sides to be “part of the solution, not part of the problem”, he added: “The creditworthiness deterioration we are experiencing is not the result of the last nine months, or changes over the last nine months, but the vast majority of that spread already existed. Are they [the Opposition] taking responsibility for the increase in their time?

“We are where we are because of successive administrations. There is a direct correlation between the actions we are taking, certain actions to achieve debt reduction, and then measuring whether they are successful.” Mr Bowe said The Bahamas also needs to improve the fiscal data and economic information being made available to investors so that it can better counter any misperceptions.

Mr Thompson, pointing out that the multi-billion dollar COVID-19 and Dorian borrowing was approved by both major political parties in Parliament, said: “The Davis administration has yet to put forward a concrete plan for expenditure restraint and for equitable revenue growth to bring the nation’s fiscal house back in order...

“The failure of the PLP to engage in real governance and to make the tough decisions is eroding the credibility of this government among Bahamians and the international bond investor community. The Government must come to the Bahamian people with a legitimate plan for fiscal consolidation, [otherwise] the confidence of the investor community will not improve and the Government will find it more and more difficult to source the financing it needs to meet its obligations.”