The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government must “stick to” its fiscal forecasts and stop treating the Budget “as an annual exercise” if it is to build much-needed investor confidence, a Bahamian banker is warning.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business that the Government must view every Budget as a fiscal outlook that projects forward at least three to five years if it is to restore local market appetite for its long-term bonds.

And he urged it to stop “abandoning” its fiscal targets and estimates within one year of their release, arguing that it undermined trust in the Government’s plans and created credibility issues just as it needed to expand the pool of bond investors beyond the traditional institutions it has always relied upon and involve their retail counterparts.

Pointing out that many institutions, such as commercial banks, insurance companies and pension funds, are at or near their prudential and regulatory limits in terms of the amount of government debt they can hold, Mr Bowe said it has “to get the confidence of the retail investor” community to buy into Bahamas Registered Stock and other debt instruments.

“The Government has to work on building confidence on three fronts,” he argued. “That it has a long-term debt management strategy; that it’s making repayments when due; and is not kicking the can down the road but is doing the necessary structural reform elements.

“Most institutions I speak to are confident in the one, two and even three-year securities because they can see the fiscal [course] in that short-term window. But if the Government wants long-term securities issued, it has to show that its strategy is not year-to-year.”

Many Bahamian investors have increasingly shied away from purchasing long-term government bonds post-COVID due to fears that the associated risk has risen sharply due to the debt and deficit blow-out produced by the pandemic. Unless institutional investors need to match long-term assets to liabilities, the market has largely shown an appetite for bonds that mature in three to five years or less.

Further evidence of such trends came from December 2022’s Bahamas Registered Stock (BRS) offering, where the Government raised just $16.647m or 83 percent of its $20m total target. Of the latter sum, some $10.17m or 61 percent was invested in bonds with maturities between three to five years. Only just over half the $8m target for the 30-year bonds was raised.

Noting that the annual Budget projects out two years when it is released every May, Mr Bowe said the Government too frequently veers away from these forecasts every 12 months even though economic conditions have not altered to such an extent as to warrant substantial deviation.

“‘The annual Budget includes two projected forward-looking years,” he told this newspaper. “When it comes to the subsequent year, it is almost as if those projections they have given are abandoned and they start again. When it comes to driving confidence, if you make three-year projections they need to stick by that unless circumstances have changed and cause a revision.

“We cannot look at the Budget as an annual exercise. They need to be three-five year exercises. We need to demonstrate we’re not looking at 12 months, but are looking out 60 months and sticking with these projections and estimates in the absence of any substantial economic changes.” Mr Bowe added that The Bahamas needs to “demonstrate it’s not behind the 8-ball, but in front of events and not behind events”.

His comments came prior to the Opposition yesterday returning to the attack over the manner in which the Government is seeking to access foreign currency borrowing via the Central Bank loaning it some $233m in International Monetary Fund (IMF) special drawing rights (SDRs).

Kwasi Thompson, former minister of state for finance in the Minnis administration, in a statement pointed out that the SDRs were listed among the Central Bank’s assets in its audited financial statements for 2021. And the Central Bank Act made clear in section 17 that “claims on international organisations, including special drawing rights held by the IMF, were to be managed by the regulator in a way that “gives priority to safety over profitability”.

“They are not, and have never been, the property of the central government for reasons that are well known and well understood,” the east Grand Bahama MP asserted of the SDRs. “Contrary to the Ministry of Finance’s press statement of January 4, 2023, the Government is in fact borrowing these assets from the Central Bank.

“And, as both the Ministry of Finance and the Central Bank have noted, they are required to pay interest rates and must repay the funds...... We repeat, however, that it is clearly and patently against the law for the Government to get any advance of funds from the Central Bank except for a capped amount of very short-term lending.”

The Memorandum of Understanding (MoU) agreed between the Central Bank and Ministry of Finance commits the Davis administration to amending the Central Bank Act to facilitate its borrowing of the IMF SDRs. The Opposition have seized on this as the Government effectively putting the cart before the horse, and entering into a transaction that has no lawful basis underpinning it.

Mr Thompson, meanwhile, pointed out that the Government’s annual borrowing plan for the 2022-2023 fiscal year made no mention of any plans to tap the external reserves - via the SDRs - as a source of foreign currency financing. “If the Government wants to take the step and become the first government to tap into the country’s foreign reserves to finance its ongoing obligations, it has to come to Parliament and explain what changed in their fiscal plan to make this necessary,” he argued.

“We remind the Davis administration that in July 2022 it published its Annual Borrowing Plan and it made zero mention of tapping into the country’s foreign reserves as part of its plan. It must explain to the Bahamian people what set of urgent circumstances caused it to deviate from its plan, and what was the rush that it had to break the law instead of coming to Parliament and changing the law to accommodate their desired drawdown of foreign reserves.

The Government’s annual borrowing plan showed it planned to source $764.7m in external foreign currency debt financing during the 2022-2023 fiscal year. Intending to avoid the global bond markets, it said this sum would be raised from multilateral institutions such as the Inter-American Development Bank (IDB) and commercial bank loans.

“Foreign currency loan financing is to be predominantly sourced from proposed new international financial institution-related policy loans totaling $372.5m, of which $160m is expected to be accessed by December 2022.This approach is aligned with the broader debt management strategy objective of lengthening the maturity structure of the debt and containing costs,” the plan said.

“The remaining $280m in commercial loans include a pipeline $100m facility scheduled for drawdown in July 2022 and drawings on a prospective international financial institution-guaranteed facility for health infrastructure. The Government [also] budgeted an estimated $112.2m in installment disbursements on existing multilateral loans associated with investment projects and budgetary support initiatives.

“Of this total, approximately $84.9m (75.7 percent) represents IDB-related projects, $21.8m (19.4 percent) are Caribbean Development [Bank] financed projects and the remaining $5.5m (4.9 percent) are associated with a European Union facility.”