The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Cabinet minister yesterday asserted “there’s nothing wrong” with The Bahamas’ economic and fiscal standing even though its long-term sovereign debt is trading at greater than 40 percent discounts with yields at 18-19 percent.

Michael Halkitis, minister of economic affairs, speaking to the media before the weekly Cabinet meeting, said sovereign bond prices - not just those of The Bahamas - were under pressure from global market conditions due to interest rate rises in the US and other major markets as they seek to control soaraway inflation.

Bond prices are traditionally inversely related to interest rates, meaning they decline as the latter increases because they become less attractive to investors. “In some quarters the price of our bonds is subject to debate, but you always have to look at that in the context of interest rates rising globally, which causes bond prices to go down,” Mr Halkitis argued.

“When you’re talking about uncertainty, you have people wanting to go more into the developed economies rather than emerging markets of which we are a part. We see their prices suffer. So we should not take it as something wrong with The Bahamas. It’s changing global conditions.

“When you see a rising interest environment that means bond prices suffer. We took the opportunity to reinforce that position and let people know The Bahamas has a proud tradition of fulfilling all of its international obligations. It’s never missed a payment, never restructured, never went into a programme,” the minister continued.

“And so, in some quarters, you have these pronouncements that we’re in trouble. Our view is our economy is strong, we have a proud history and the recovery is going nicely. Our fiscal position has improved in terms of the Budget; the Budget performance last year and the Budget performance so far for the first quarter. We’re optimistic, cautiously so” because of the threat from external shocks such as hurricanes, COVID and the Russia/Ukraine conflict.

However, The Bahamas’ outstanding long-term sovereign debt continues to trade at deep discounts and high yields on the international markets. A $300m bond, placed at a 6.95 percent interest rate and due to mature in 2029, closed on Germany’s Frankfurt Stock Exchange last night at 56.43 - a more than 43.5 percent discount to face value. And the yield being demanded by investors was just shy of 19 percent at 18.917 percent.

And The Bahamas’ last major foreign currency sovereign debt issue, the $825m placed at the height of the COVID-19 pandemic at 8.95 percent and due to mature in 2032, closed last night at a near-40 percent discount to its face value and a yield of more than 18 percent. Capital markets sources described these yields and discounts as typical for countries deemed to be at risk of default, one saying they were “unreal”.

Bloomberg News in June this year named The Bahamas 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 were war-torn Ukraine, Belarus, the Maldives, Tajikistan and Pakistan, with Kenya, Ecuador, Nigeria and Egypt making up the remainder.

David Slatter, RF Bank & Trust’s vice-president of investments, told Tribune Business that the yield being sought by international investors on The Bahamas’ shorter-term debt, due to mature in 2024, is now in the 20 percent range. “The global markets are still very concerned about the ability of the Government to meet its obligations,” he added. 

Mr Slatter said “the key risk” period for The Bahamas lies towards the end of this decade when foreign currency debt issues held by international investors mature in successive years. The Central Bank, though, recently removed the investment currency premium for Bahamian investors - both institutions and retail - so they can buy this nation’s sovereign US dollar debt.

“We’ve had quite a few queries about that,” Mr Slatter said. “It has not been overwhelming, but it’s steady. Each day a number of people are making inquiries about opening up a brokerage account to do trading, or existing clients looking to pick that up.”

He explained, though, that investing in the Government’s US dollar foreign currency debt is not as straightforward as it may appear. The $250,000 minimum purchase, for example, may push this beyond individual retail investors and require that they combine resources with the bonds subsequently allocated in proportion to their contribution.

International finance houses, and broker/dealers, through which trades must be executed will also charge commissions and have “a bid and ask spread”, meaning that returns are likely to be a couple of percentage points lower than the actual yield on the bonds.

Mr Slatter suggested that the Central Bank had removed the premium as “a way for Bahamians to invest in US dollars and invest in bonds with a high yield and very low possibility of default”. Another capital markets source, speaking on condition of anonymity, said the move will expand demand and the pool of investors buying the Government’s foreign currency debt in a bid to bring the yield down from the present 18-19 percent.