The Tribune

• Gov’t has three years to reduce its ‘risk profile’

• And restore market confidence/lower rollover risk

• As multi-million bonds mature every year to 2033

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government has a narrow window to “get its fiscal house in order” and refinance $2.36bn in external bonds maturing over an eight-year period without challenges, a governance reformer warned yesterday.

Hubert Edwards, head of the Organisation for Responsible Governance’s (ORG) economic development committee, told Tribune Business that concerns over this “rollover risk” stem mainly from The Bahamas’ plunge to ‘junk’ creditworthiness with the international rating agencies as opposed to global credit market conditions.

Pointing out that this nation would still be able to access international bond markets at reasonable costs if it had retained ‘investment grade’ status, he added that it was vital The Bahamas reduce its “risk profile” and boost its credibility with lenders/investors in the three years remaining before this $2.3bn debt starts to mature in 2026 and the principal becomes due for repayment.

Achieving these objectives means it is vital that the Davis administration hit its forecast $131m deficit target for the current fiscal year, plus attain the projected Budget surplus in 2024-2025, but Mr Edwards told this newspaper he was uncertain if post-COVID economic growth momentum will be sufficient. If not, he warned that the Government may have to adopt “austere” measures such as new and/or increased taxes, spending cuts or a combination of both to restore market confidence.

“We know potential rollover risk is something that is real. We have been talking about it for quite some time,” Mr Edwards said, pointing to a 2021 column published by this newspaper in which he mentioned the issue. “As early as 2021 there were signs there were going to be some challenge with rollover risk.”

The Inter-American Development Bank (IDB), in its 2023 second quarter Caribbean bulletin, warned The Bahamas 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.

Aside from these loans, it added that “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.

“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......

“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.”

Simon Wilson, the Ministry of Finance’s financial secretary, could not be reached for comment yesterday while Michael Halkitis, minister of economic affairs, did not respond to a detailed Tribune Business message on the topic before press time last night. However, both the Central Bank and the Government’s medium-term debt management strategy show that $250m of external foreign currency bonds are due to mature in every year between 2026 and 2028.

The annual peak will be hit in 2029 at $550m, with a further $275m due for repayment in each of 2030, 2031 and 2032. Some $233.75m will also mature in 2033. The Government’s latest medium-term debt strategy covers up until the 2025-2026 fiscal year, when the start of eight consecutive annual maturities hits. While that period is not covered, the Davis administration will be responsible for laying the groundwork for whoever succeeds it and has to address the issue.

Pointing to the four so-called ‘sinking funds’ that have been set-up to “reduce refinancing risk in respect of future bond redemptions”, the medium-term debt management strategy said these will now also be financed from the collection of tax arrears as well as Budget contributions.

Acknowledging that present market conditions, with high interest rates and widening emerging market spreads effectively cutting The Bahamas off from raising capital via international bonds, the report said: “The Bahamas witnessed significantly higher yields on its international bonds, by an average of approximately 520 basis points, through early November 2022.

“Since the beginning of the COVID-19 crisis, The Bahamas synthetic 10-year US dollar yield firmed progressively to reach a maximum of 14.7 percent in August 2022, and has gradually decreased since then. Although foreign currency debt refinancing needs remain manageable over the medium term, The Bahamas international yield levels have made the Eurobond market an unattractive source of funding.”

The report, though, added that market outreach efforts had reduced yields by “more than 800 basis points for the 2024 Eurobond since October 2022”. And The Bahamas’ existing international bond issues seem to have stabilised on the global markets based on current indicators.

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, Mr Edwards challenged the rush to blame international market conditions for the medium-term refinancing concerns. “The reality is, if you look at it objectively, that if The Bahamas was able to borrow at ‘triple A’ ratings in the current market it would be able to access credit way cheaper than the debt it is currently funding,” he argued.

“I’m not so sure it’s a function of the market, although the market conditions have been impacted by inflation and high interest rates. It’s not simply a function of the market and market deterioration. It’s a function of the creditworthiness of The Bahamas.

“The Bahamas finds itself at a place where it has a significant concentration of external debt, maybe more than it has ever had in the history of the country..... It has suffered over the last couple of years a number of credit downgrades which effectively put it into ‘junk’ bond status. There are elevated external pressures on The Bahamas at this time.”

Mr Edwards said the challenges The Bahamas will face, if it fails to hit Budget targets, improve its creditworthiness and restore investor confidence, are refinancing that maturing debt pile at reasonable interests rates (cost) to the Bahamian taxpayer and, possibly, at all. The downgrades by the credit rating agencies also started before Hurricane Dorian and COVID-19.

While the annual medium-term maturities “should not really present a refinancing problem” for The Bahamas, he added: “Is it the market which is exerting pressure, or is it the state of the country’s finances which is making it difficult for it to access credit at reasonable levels and, when faced with having to go to the private market, the private market is likely to assess a significant premium or be unwilling to roll over given the risk profile they place on the country?

“That is what we are dealing with, not market conditions. When we think about where we are today, and talking about rolling over in the medium-term over an eight-year period, the question is what will be done over the next three years to improve the creditworthiness of the country and reduces the rollover risk it is facing.

“Ultimately, it is about the performance and whether or not The Bahamas improves its revenue standing, improves its ability to cover expenses and heads on the trajectory projected into surpluses.” Mr Edwards said economic growth will be “fundamentally important” to altering the country’s prospects, but questions remain over the sources that The Bahamas can rely on to “grow ourselves out of these circumstances”.

He suggested The Bahamas faces a “catch-22”, as failure to generate the necessary GDP and fiscal outcomes could force the Government into austerity measures that may, in turn, damage economic growth. The ORG executive voiced optimism that the upcoming Speech from the Throne, where the governor-general lays out the Government’s new legislative agenda, will signal how it plans to tackle these issues.

“The challenge is that, without growth, without improvement, the Government may have to think in austere ways, either significantly increasing taxes or reductions in expenditure. At some point in time, the Government is going to have to get their fiscal house in order,” Mr Edwards said.

He warned that the required GDP growth may be two to three years “down the road, and added: “The Government will have to do what it needs to do to maintain the confidence of the credit market, get itself in a better position to reduce its rollover risk profile and, if that cannot be improved, at least ensure there’s no further deterioration.”