The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government is aiming to avoid the international bond markets for a third successive fiscal year as it bids to raise $360m in foreign currency bank loans to meet its $1.803bn gross financing needs.

The Davis administration’s 2024-2025 annual borrowing plan, which sets out how it plans to meet the Government’s debt financing needs, confirms that it will seek to meet these via Bahamian investors in the domestic market rather than through foreign currency borrowing.

The plan, which was released quietly on Wednesday, confirms that the Government needs to refinance or roll over some $1.734bn in existing debt over the 12 months to end-June 2025 as well as cover the 2024-2025 fiscal year’s forecast deficit of $69.8m. Combining the two figures produces the total $1.803bn financing requirement, which is equal to 11.8 percent of Bahamian economic output or GDP.

Simon Wilson, the Ministry of Finance’s financial secretary, could not be reached for comment despite numerous attempts. However, the plan itself said: “The annual borrowing plan proposes financing approximately $1.175bn (65.2 percent) of the gross financing needs in Bahamian dollars, and $628.3m (34.8 per cent) via a combination of internal foreign currency and external loans.

Of the $392.8m in foreign currency funding to be sourced from outside The Bahamas, the majority - some $360m - is to be sourced via commercial bank loans with no attempt made to tap the international bond markets. The $32.8m balance is to come from drawing down on existing loan facilities with the Inter-American Development Bank (IDB) and Caribbean Development Bank (CDB).

“Government is currently exploring multiple commercial loan opportunities for raising approximately $360m,” the annual borrowing plan said. “In light of the multiple foreign currency financing opportunities being explored, the Government retains discretion as to the final sequencing and composition of external funding sources, which will be determined with due consideration to market conditions, cost/risk factors and cash flow requirements.”

No further details were provided on these financing arrangements. The amount of foreign currency debt to be sourced from external sources, meaning foreign lenders outside The Bahamas, was pegged at 206 percent - just over one-fifth - of the Government’s funding requirements for the 2024-2025 fiscal year.

However, one financial source, speaking on condition of anonymity, questioned whether the lack of detail on the Government’s external funding plans will impress the global capital markets and holders of existing Bahamian sovereign debt.

“It was very thin,” they argued of the 2024-2025 annual borrowing plan. “It will be interesting to see how the bond market reacts because of the lack of detail. That’s not much of a plan at all. We’re hoping that the banks lend us money. The purpose of the annual borrowing plan is to show the market you have your intended sources identified.”

The source added that the Government’s greatest financial challenge continues to be accessing foreign currency debt financing at competitive, affordable interest rates that do not burden Bahamian taxpayers with high repayments.

They added that the all-in interest rate of 8.6467 percent, secured on the $500m foreign currency loan taken out earlier this year and partially supported by an IDB guarantee, was only just below the 8.95 percent coupon for the $600m international foreign currency bond placed in 2020 at the height of the COVID pandemic. 

The global capital markets’ reaction to the Government’s 2024-2025 Budget has, to-date, been lukewarm at best with the prices and yields on outstanding and issued Bahamian sovereign bonds dropping slightly since its end-May unveiling although they appear to have stabilised now.

The $825m bond due to mature in 2032, with an 8.95 percent interest coupon, yesterday closed on the Frankfurt Stock Exchange at 93.85 - a more than 6 percent discount to par value, and a decline from its two-year high of 99.26 which was achieved prior to the Budget. The yield has also moved back into double digits at 10.309 percent.

As for the $300m bond set to mature in 2028, and which carries a 6.95 percent coupon, it closed at 83.82 as compared to the 91.2 two-year high achieved prior to the Budget. The yield demanded by investors was also in double-digit territory at 11.376 percent.

“Our bonds have stabilised at a lower price point,” the source said. “I don’t know if the annual borrowing plan will give the markets confidence they have the financing in hand. It will be interesting to see how the bonds perform over the next few weeks.”

As for domestic financing sources, the Government says it plans to secure a $100m commercial bank loan and roll over the $235.5m IMF special drawing rights (SDRs) that it obtained from the Central Bank of The Bahamas. The remaining $1.176bn of its $1.511bn domestic financing needs will be secured via new bond and Treasury Bill issues.

“Maturing bonds of $907.3m are expected to be refinanced with new issuances. With an incremental $167.7m targeted to be sourced from the market during the fiscal year, the bond issuances aggregate $1.075bn or 59.6 percent of domestic fund raising,” the Ministry of Finance’s plan said.

“Treasury bill tenders remain a central aspect of the annual borrowing plan funding operations. The intent is to rollover the combined $1.138bn in outstanding bills at end-June 2024. Intra-year, Treasury bill issuances will be utilised to smooth out short-term cash flow requirements.”

However, with local investor appetite increasingly tilted to short-term government paper because of the perceived risk, the Government plans to raise the bulk of its 2024-2025 bond financing via one-year issuances. These range in size from $70m to $234m, but demonstrate investor skittishness regarding government debt securities with maturities extending beyond three to five years.

Raising the bulk of its financing in Bahamian dollars is a key goal of the Government’s funding strategy as it reduces the pressure on the external reserves and likely involves lower interest rates. However, the source said the increasing reliance on short-term one-year bonds and paper could eventually become “problematic”.

“They’re getting into a cycle of near-terming the debt, which is find until some of the investors decide they don’t want to roll-over and want to be paid out,” they said. “A lot of institutional investors are at their prudential limits for government paper. They are tapped out.”

Besides such refinancing running counter to the Government’s goal of extending out bond maturities, and smoothing its payment liabilities, the source added: “All this is tied back to their aggressive stance on collecting revenue. They [the Government] don’t want to bite the bullet on tax increases or expenditure restraint for obvious reasons, but at some point they have to appreciate there is no easy out.”

The Ministry of Finance’s plan said it will “seek to broaden retail investors in the domestic debt market through the launch of the Government’s savings bond during the opening quarter of fiscal year 2024-2025”, which means the current period between now and end-September. That product is being developed by the Central Bank.

“On the domestic front, the Government intends to proactively engage with major market players in the Government securities market using its existing quarterly forums. The soon-to-be launched educational campaign on the upcoming savings bond programme will seek to deepen the pool of retail investors’ through enhancing their understanding of how the Government securities market operates,” the plan added.