The Tribune

• Says $900m in loans due within two years

• Bonds maturing every year from 2026-2032

• Exploiting tourism boom is ‘not easy task’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas has been warned it may “face difficulties to roll over existing debt” in the medium-term if market conditions do not improve with almost $900m in external foreign currency loans coming due in the next two years.

The Inter-American Development Bank (IDB), in its 2023 second quarter economic bulletin on the Caribbean, said “sound” debt management will be “key” for the Government over the next decade with at least $250m in foreign currency bonds held by external investors due to mature every year between 2026 and 2032.

With “most” of the Government’s external bonds set to come due for repayment between now and 2032, including $550m in principal that matures in 2029, the IDB also warned that “external loans” extended by foreign creditors will create further debt management pressures for successive administrations.

“Although no sovereign external bonds will mature before 2024, between 2026 and 2032 there are bonds maturing every year of at least $250m,” the IDB said. “Even though the country is not facing an immediate need to roll over external bonds, within ten years most of its bonds will mature and in 2029 alone the amount will reach $550m.

“Amortisation of external loans will also exert pressure, since within the next two fiscal years $899m will need to be repaid. Domestic debt is also elevated and, in fiscal year 2023-2024, securities amounting to $779m are maturing. If market conditions continue deteriorating in the medium term, The Bahamas could potentially face difficulties to roll over existing debt. For these reasons, a close monitoring of debt trends and sound public debt management will be key during this and the next couple of years.”

The Government is keenly aware of such pressures. Simon Wilson, the Ministry of Finance’s financial secretary, could not be reached for comment before press time last night. However, he told Tribune Business in an August 2 interview that there are “no issues” over the Government’s ability to refinance some $3.466bn in combined Bahamian dollar and foreign currency debt maturing this fiscal year given its access to “credit lines”.

Mr Wilson said at the time he was “very confident” the Government will be able to rollover, or refinance, more than 28 percent of its total debt portfolio during the coming 12 months based on feedback already received from investors and holders of these securities. “We have done market reads and have credit lines available,” he said.

The Bahamas has to refinance some $868.1m of external debt, meaning foreign currency-denominated bonds and other IOUs held by overseas investors, and $2.598bn in domestic debt held by Bahamian institutions and individuals over the 2023-2024 fiscal period which closes at end-June next year.

However, one financial source, speaking on condition of anonymity, said: “The IDB is sounding the alarm. That’s pretty clear. There’s still tremendous medium term issues given the amount of debt maturities that the Government has to rollover. That means that they have to be judicious with their budgeting plan, restrain expenditure and improve revenue yields.

“The emphasis on enforcement is the right thing, but that and the incremental measures they have taken will not yield enough to put us on a solid footing.” Without increased revenue, the source said the Government might have to look at spending cuts to offset any shortfalls, and hit its $131m deficit target for 2023-2024, rather than simply seek to hold total expenditure at just over $3bn.

“The good news is we’re not in a critical space yet, but the bad news is if we don’t take steps to achieve comprehensive fiscal consolidation that could put the finances at risk and have consequences for all of our debts,” the source added. They questioned whether there the IDB report may have any impact on the multilateral lender’s willingness to provide the guarantees the Government is seeking to access low-cost foreign currency loans this year.

The prevailing high interest rate environment, as global central banks seek to combat inflation, and widening emerging market spreads against US Treasuries, mean The Bahamas is presently avoiding the international bond markets for capital raising given the higher costs (rates) it would have to pay. This would merely add to the already-high interest burden on Bahamian taxpayers.

The Bahamas’ existing international bond issues seem to have stabilised on the global markets. The $300m bond, priced at 6.95 percent and due to mature in 2029, closed last week at a near-20 percent discount to par and an 11.795 percent yield on the Frankfurt exchange. The $825m bond, placed at 8.95 percent during COVID and due to mature in 2032, is presently at a near-15 percent discount to par ad 11.9372 percent yield.

However, the IDB’s concerns are in line with those of Moody’s, the credit rating agency, which warned in its latest June 2023 update that “the major risk” facing The Bahamas is the potential difficulties it will encounter in refinancing some $1.9bn of maturing debt at reasonable interest rate costs.

Noting that these refinancing needs, equivalent to 14.3 percent of Bahamian gross domestic product (GDP), will come due in the 2023-2024 fiscal year, Moody’s said the Davis administration will “need to find alternative financing sources” given that international capital markets are effectively closed to it due to the high prevailing interest rate environment.

“The major risk for the sovereign [The Bahamas] centres on challenges in financing and refinancing its upcoming maturities. Even with a narrowing fiscal deficit that turns to a surplus in fiscal 2025, the Government faces large gross financing needs. The Government will see a peak in maturities due in fiscal 2024, when gross refinancing needs reach 14.3 percent of GDP,” Moody’s said.

“Although the Government doesn’t intend to access international bond markets through commercial issuance, it will need to find alternative financing sources to repay upcoming external amortisations amid still tight financing conditions. Refinancing upcoming maturities at higher borrowing costs would weigh on the Government’s debt affordability.”

The IDB, meanwhile, said The Bahamas also faces “the not easy task” of using its post-COVID tourism boom to improve public infrastructure and physical skills so that the financial benefits are maximised by the country. “The Bahamas is experiencing a tourism boom since the easing of international travel restrictions since mid-2022, and visitors from key source markets make up for the inability to travel during the previous two years,” it said.

“Such boom is having the expected positive impact on the Bahamian economy: Increasing employment and raising government revenue. Bahamian society is in a good position to make the most of the tailwinds from the tourism boom. Increasing investment in both physical and human capital to diversify the economy will be key to increasing medium-term growth and productivity.

“Accumulating international reserves while managing the fixed exchange rate regime, and increasing fiscal buffers, are key for the bad times that might come in the form of natural disasters.” Looking ahead, the IDB added: “Beyond the short-term, the tourist boom is an important opportunity to be taken advantage of to improve Bahamian lives.

“These opportunities are not occurring only in activities associated with lodging and related activities, but also for the structural development of the country such as the improvement physical and digital infrastructure and deepen human capital development. Macroeconomic policy management has proven resilient and able to deal with several and consecutive negative shocks; now it is time for the not easy task of administering a boom to accomplish the goals set up in the Government’s Budget.....

“The fiscal deficit has narrowed in a considerable way over the last two years of post-pandemic recovery thanks to the authorities’ efforts to increase revenue collection and contain and optimise fiscal expenditures as well as enacting a series of institutional reforms to support sounder fiscal management. All these efforts are just starting to bear fruit, so continuing this path will be very beneficial to lower the perception of risk in international markets as well as to also free up resources for the development of the private sector, particularly small and medium-sized enterprises (SMEs).”