The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government cannot appear to be dictating how private companies invest their monies, a well-known banker is warning, following the furore over insurers possibly having to hold a “minimum” 50 percent of assets in public sector securities.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business in a recent interview that while the Government was “obviously keen” to raise the bulk of its financing needs in the local capital markets by tapping the banking system’s $2.876bn excess liquidity this has to be done in a “delicate” manner.

He argued that Bahamas-based investors, both institutional and retail, needed to be persuaded that government bonds, Treasury Bills and other securities are a sounder investment - and will deliver higher rates of return - than alternative options rather than being mandated or told that they must invest a certain portion of their assets in government instruments

The Davis administration has already received significant push back from the insurance industry over a proposal - seemingly stemming from an International Monetary Fund (IMF) team that visited The Bahamas in March 2023 to assess the country’s capital markets - that they should invest a “minimum” 50 percent of their assets in government securities.

The Bahamas Insurance Association (BIA), in a letter issued to sector regulator, the Insurance Commission, warned it had “grave concerns” with a proposal seemingly trying to “dictate” the investment strategy of individual carriers and which could ultimately “lead to the collapse of the industry” by disrupting its ability to match assets, and the returns they generate, with its liabilities as they mature.

Mr Bowe, backing the sector’s concerns, said of the Government: “They are obviously keen to extract as much from the excess liquidity in the Bahamian marketplace as they can, but that has to be done very delicately, and not seen as a draconian action.

“It has to be commercial and valid. It cannot be because ‘I’m the Government and I’m telling you that you have to’. They have to show it’s [government securities] a better investment than a low-risk bank deposit.” Mr Bowe added that while The Bahamas has the ability to finance the Government’s needs locally, this goes hand-in-hand with a debt management strategy and medium-term fiscal plan.

Simon Wilson, the Ministry of Finance’s financial secretary, previously told this newspaper that insurers had “over-reacted” to the minimum 50 percent government securities investment proposal as it was not near to becoming reality. He added that the IMF team had been “slightly surprised” to learn that there was no minimum threshold for government securities holdings imposed on Bahamian underwriters even though the sector was seen as the cause of many past Caribbean financial “meltdowns”.

The Prime Minister in guarded, technical language during the 2023-2024 Budget presentation confirmed that the Government is seeking to meet the bulk of its deficit financing and rollover needs through the domestic Bahamian capital markets. He also signalled that his administration wants to broaden the investor base, and encourage non-financial companies to buy government securities, by eliminating all taxation on the interest income derived from these assets.

However, in effect the Government is being forced to focus locally to meet its financial needs because it has largely been cut-off and priced out of the international capital markets - especially the bond market - at least for the moment. Global interest rates have moved against The Bahamas, as the US Federal Reserve and other central banks raise them to combat inflation, which has increased debt servicing costs for the country’s existing debt and any new issues in the near-term.

And successive annual downgrades of The Bahamas’ sovereign creditworthiness by Standard & Poor’s (S&P) and Moody’s, the latter initiating the latest move in October 2022, have propelled this nation further into so-called ‘junk’ status and meant there is greater risk associated with investing in its debt. This means investors will demand a higher price (interest rate cost) from The Bahamas, likely meaning it could have to borrow at double-digits internationally.

Moody’s, which otherwise gave The Bahamas’ a relatively favourable 2023-2024 Budget review, warned last week 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 interest rate environment.

Moody’s said of the Government yesterday: “Interest payments are projected to grow over the coming years and will be higher than expected.

“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.

“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 Ministry of Finance’s last debt bulletin, issued in April 2023, showed almost $1.9bn in debt principal as coming due during the upcoming 2023-2024 fiscal year. While some $1.029bn is owed to domestic creditors, with most likely denominated in Bahamian dollars, some $868.2m is owed externally and likely denominated in US dollars or other foreign currency, which could impose pressures on the foreign currency reserves.

Mr Davis, in his Budget presentation, said: “In our view, The Bahamas has the potential to expand the domestic government securities market, and reduce its dependence on external borrowing. This shift towards higher domestic financing could provide a more sustainable and stable source of funding for the country’s needs.......

“In terms of policy reform, a significant step forward will be to promote and encourage an increase in the level of government securities held by regulated and unregulated businesses. Therefore, in this Budget, the Government is removing any tax on the interest income that a business would otherwise incur by holding any type of government securities.

“In addition, there will be the formulation of a master repurchase agreement for government securities. This initiative will add agility to the local bond market and bolster Central Bank monetary policy operations. In the long-term, the Government will seek to implement buy-backs and switches to standardise and increase the depth of securities trading across the secondary market.”