The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

More Bahamians are struggling to afford their own home because wages have remained relatively stagnant while the average monthly mortgage payment has near-doubled since the 21st century started.

The International Monetary Fund (IMF), unveiling updated research on The Bahamas’ housing struggles, signalled that affordability is a key factor with nominal monthly mortgage payments having increased from around $1,000 at the turn of the century to just below $2,000 in 2022-2023. The increase came despite incomes, salaries and other worker compensation being little changed for the past 13 years.

“Employee compensation per capita has remained almost unchanged compared to 2012,” the Fund said of The Bahamas. “Average monthly payments on residential mortgages have increased more rapidly, despite the secular decline in average interest rates for residential mortgages over the same period.”

Besides affordability, access to and qualifying for mortgage financing was identified as a further obstacle to Bahamian ownership dreams. Data displayed by the IMF showed that the number of new annual residential mortgage commitments has fallen from a peak of around 2,500 per year in 2008, which was when the financial crisis and global recession hit, to less than 1,000 per year since 2020 and the COVID pandemic.

That marks a decline of more than 60 percent from the 2008 peak, and the IMF said: “Financing constraints may also be an obstacle to home ownership. The number of new residential mortgage commitments for single dwellings and duplex and row dwellings have trended downward since 2008....

“Mortgage applications recorded the lowest approval rate of all credit categories in the 2024 first half, standing at 54.3 percent. Most application denials were due largely to low credit scores, constraints on banks’ lending outside of internal policy, underemployment, the applicant’s prior history of delinquency on prior loans, higher debt service ratios, insufficient working history in the current job, the bank’s inability to verify the applicant’s income and inadequate funds for a down payment.”

Elsewhere, the IMF, in a research blitz on The Bahamas, estimated in a separate study that the “spreads” on Bahamian external sovereign debt could decline by up to 2.4 percentage points by 2029 if the country’s sovereign creditworthiness is upgraded by the likes of Moody’s, Standard & Poor’s (S&P) and Fitch. Such a decline would also benefit Bahamian taxpayers by lowering the country’s borrowing costs.

‘Spreads’ measure the difference in interest, or the yield, paid on Bahamian government bonds versus what is paid on others, with US Treasuries usually used as the benchmark. The IMF report suggested “sustained and credible efforts” will be required to secure an improvement in The Bahamas’ credit rating, while inclusion in indices such as JP Morgan’s emerging market bond index could also have cut The Bahamas’ spreads.

Noting that The Bahamas’ credit rating, which is presently in ‘junk’ territory with all three rating agencies and non-investment grade, together with investor “risk aversion” has a major impact on sovereign bond spreads, the IMF recalled how the interest rate or yields on this nation’s debt soared by more than 10 percentage points during the peak of the COVID-19 pandemic and its aftermath.

“Spreads on Bahamian sovereign bonds issued on international capital markets increased sharply following the onset of the COVID-19 pandemic, rising by as much as 1,200 basis points - more than five times’ their pre-pandemic levels,” the Fund’s paper added.

“The country faced multiple challenges during this period, including a substantial rise in debt driven by both pandemic-related expenditures and the impact of a major hurricane [Dorian] that occurred just prior to the pandemic. Moreover, the Bahamian economy, heavily reliant on tourism, was severely impacted by the global downturn in travel.

“Although spreads have recently moderated, they remain elevated relative to their historical levels. Wider spreads imply higher government borrowing costs, and consequently that a larger share of fiscal resources has to be devoted to servicing public debt.” This means increasing sums of money diverted away from much-needed public services such as health, education, national security and social security.

“Changes in The Bahamas’ sovereign rating correspond closely with significant movements in Bahamian sovereign spreads,” the IMF paper said. “The country’s median rating dropped from ‘BBB’ to ‘BB’ in early 2020, and again from ‘BB’ to ‘B’ in late 2022. At both times, the fitted spread exhibits discrete jumps, consistent with relatively large estimated coefficients for sovereign rating grades below investment grade.

“These jumps in the fitted spread coincide closely with increases in the observed sovereign spread, though it is notable that spread increases can precede official rating downgrades by several months.... Inclusion in bond indices like the Emerging Market Global Bond Index could lower sovereign spreads, for example through increasing the available investor base.

“The spreads in The Bahamas would have compressed by 56 basis points (0.56 percentage points) compared to other countries with similar fundamentals if the archipelago were included in JP Morgan’s Emerging Market Bond Index Global.”

However, the bigger gains for The Bahamas lie in improving its fiscal and economic fundamentals such that its sovereign credit worthiness is upgraded. The Davis administration recently unveiled a return to ‘investment grade’ status with all three rating agencies and an escape from ‘junk’ territory as being one of its key objectives.

“Bahamian external sovereign spreads could decline by 65 to 240 basis points by 2029 if there is a rating upgrade from sustained and credible fiscal efforts,” the IMF paper forecast. The lower end of that range would be achieved without a rating upgrade and relies on favourable movements in global bond market indices.

However, the IMF then added: “Under the scenario with a rating upgrade by one notch, the fitted value declines by an additional 175 basis points, implying a spread of about 260 basis points by 2029, a level close to the pre-pandemic period.

“Since rating upgrades are often linked to improvements in a country’s macroeconomic fundamentals and its fiscal situation, this suggests that an appropriate domestic policy mix can lead to substantial drop in spreads and funding costs.”