The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Demand for long-term Bahamas government debt is unlikely to recover until after a 2026 general election but that is not necessarily a bad outcome, a senior banker predicted yesterday.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business that local investor aversion to 20 and 30-year Bahamian dollar government bonds has imposed greater fiscal “discipline” on the Davis administration, forcing it to be more transparent and accountable, while also benefiting taxpayers and the wider economy through reducing its borrowing costs.

He explained that the need to refinance almost 38 percent of its total Bahamian dollar debt during the current 2023-2024 fiscal year has imposed “guard rails”, which prevent the Government from engaging in reckless spending or other irresponsible financial actions, because doing so will undermine local investor confidence and potentially cause such rollovers to fail.

And, with Bahamian banks, insurance companies, pension funds and other Government bond buyers increasingly showing appetite for paper with maturities of five years or less, Mr Bowe told this newspaper that such trends are benefiting taxpayers because shorter-term debt typically attracts a lower interest coupon than the 20 and 30-year variety.

As a result, both the Government’s borrowing costs and debt service burden imposed on taxpayers are reduced. Acknowledging that these results are slightly fortuitous, and there is likely “frustration” on the Government’s part through having to adapt to these market conditions, the Fidelity Bank (Bahamas) chief said this had “put the power where it should be” - in the hands of investors, not the Ministry of Finance.

Pointing out that any failure to engage investors, and be transparent over the fiscal position, will only increase the Government’s “refinancing risk” in the present climate, Mr Bowe said: “They have a high volume of maturing debt for which they have to maintain confidence. It benefits the local markets and benefits them by increasing their fiscal transparency and reporting, and makes them earn their keep.”

The Government’s quarterly public debt bulletin for the final quarter of the prior 2022-2023 fiscal year showed that that, out of a total $6.868bn in Bahamian dollar debt featuring a mixture of bonds, Treasury Bills loans and bank overdrafts, some $2.598bn or almost 38 percent - more than one out of every three dollars - was due to mature during this current fiscal.

Of that $2.598bn, some $1.561bn remains to be refinanced between April and June 2024, the Government’s own data shows. And, in the upcoming 2024-2025 fiscal year, the Davis administration has to refinance another $1.256bn of Bahamian dollar debt, equivalent to 18 percent of the total $7.002bn outstanding.

Given that much of this debt is only being refinanced, or extended, for between one to three years, it is paramount for the Government to maintain Bahamian investor confidence to successfully execute the required rollovers thus acting as something of a check on its fiscal behaviour given the minimal appetite for long-term bonds.

“There have been spurts when you the life insurance companies and pension plans may grab a bit of it,” Mr Bowe said of 20 and 30-year government paper, “but, in general, for the last 24 to 36 months, two-and-a-half years, the long-term debt has been under-subscribed. Even the ten years is not seeing oversubscriptions.

“There are significantly more in the three to five-year paper. It certainly slows when you get to ten, 20 and 30 years. Those subscription levels have not recovered to high levels, and I don’t think that’s going to alter - in my view - for 24 months.

“In reality, there’s a need for the Government to demonstrate continued fiscal discipline. To ensure the guard rails are maintained around election spending, I don’t think we’ll see any long-term [investor] appetite until we get through this election cycle. To be perfectly honest, I see it as a positive element, though it may be a bit frustrating from their [government] perspective because they are not used to it.”

While insurance companies and pension funds still need to purchase 20 and 30-year government paper, given their need to match long-term assets with liabilities, other local investors have shown a much-reduced appetite for such long-term debt in the aftermath of COVID-19. The pandemic caused the national debt to soar to now-$11.7bn, and concerns emerged over the The Bahamas’ elevated financing risk.

Recent government bond auctions highlight these trends. In the April 15, 2024, issuance, the $7m, 30-year tranche due to mature in 2054 was under-subscribed by more than $1m. Just $5.902m, or around 84 percent of the total amount sought, was raised.

However, on May 2, 2024, the $84m issue of one-year government debt securities was oversubscribed by almost $20m with $103.09m in bids received. The investor returns, though, were much lower than on the previous 30-year bond, with the interest rate standing at between 3.24 and 3.35 percent as compared to 6.59 percent on the longer-term variety.

This shows that Bahamas government bond buyers are opting for lower-risk, lower-yielding debt securities as opposed to the higher returns that can be achieved on the longer-term but riskier paper. Mr Bowe, confirming these rates, said the Government is benefiting from lower domestic borrowing costs at a time when the international capital market environment is against The Bahamas.

However, he argued that the Davis administration should use the resulting savings to “beef up” the sinking funds established to help meet repayment of the Government’s foreign currency bond issues when they mature rather than employ them for “spending on alternative uses”.

As for the more frequent rollovers and refinancing of government debt, Mr Bowe added: “The reality is that’s an inconvenience that we will happily endure. It allows for more frequent reviews of the fiscal performance, It requires them to be more communicative and engaged with the local market, and it allows for a look at the latest information and a greater appreciation for the continued discipline.

“While it may add a few hours to the work week in the year, ultimately it allows us to extend credit but with the appropriate level of due diligence we’d not normally have and more frequently. The fact the Government has to refinance more than $1bn on an annual basis means they truly have to ensure they are periodically reporting and updating the market” on a quarterly basis.

Warning that “failure to do so increases the refinancing risk” for the Government, Mr Bowe said it needed to adopt the disclosure practices of Bahamian publicly listed and traded companies who all have to provide financial reports to their shareholders on a quarterly basis. In return for the lower interest coupons, it needs to “demonstrate longer periods of fiscal discipline”.

“I don’t think there’s any risk of default on the part of the Government,” he added, “but there are still issues with liquidity in making sure there are available funds ready for payment and government continues to have foreign currency obligations that continue to come due.

“There’s a fair amount of debt management necessary so having to come to the bond market frequently is a good thing because it keeps the information flowing. I would say, mischievously, it has put the power where it should be.

“The power sits in the hands of the bondholders where it should be, and the Government must maintain their confidence as opposed to long-term paper where it gets the funds without the same level of accountability in a regular basis. It has a benefit to the wider economy because of the lower debt service costs. It may not have been deliberately instituted that way but the consequences are positive.”