The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government is predicting it will slash its direct debt by $866m during the three fiscal years to end-June 2028 as a result of generating three consecutive annual fiscal surpluses.

The Government’s medium-term debt management strategy, which was yesterday tabled in the House of Assembly by the Prime Minister, forecast that it will produce this “overall debt repayment” for the fiscal years 2025-2026 through to 2027-2028 via successive annual Budget surpluses of close to half-a-billion dollars.

The report, which reveals the Government is seeking to finance 80 percent of its borrowing needs for those three years from domestic or Bahamian dollar lending sources, suggests the Davis administration remains firmly wedded to the fiscal targets set in the 2024-2025 Budget despite incurring a $394.8m half-year deficit which is more than five times’ or $325m higher than the full-year goal.

The Government is still forecasting that it will generate three consecutive fiscal surpluses, ranging between $448.2m and $467.9m, for the period covered by the report. Without these surpluses, and the Government’s revenue income exceeding total spending by a combined $1.374bn during that time, it will not be able to achieve the projected $866m reduction in The Bahamas’ national debt.

But, should these projections hold true, the Davis administration is predicting that its chosen debt management strategy will produce a net $603m reduction in the Government’s foreign currency debt and a further $263m decline in domestic Bahamian dollar liabilities through to the end of the 2027-2028 fiscal year. “A negative figure represents an overall debt repayment,” the strategy report confirmed;

The Government, for the next three years, has elected to manage its debt through a strategy that focuses on developing the domestic Bahamian capital markets while also concentrating on managing refinancing, or rollover, risks.

To do so, it will seek to issue “longer-term domestic instruments” such as bonds, and move away from shorter-term Treasury Bills, in a bid to extend and spread out when these mature and become due for repayment to investors so that the Government does not face multiple debt refinancings at the same time. And, on the foreign currency side, it will continue to seek “semi-concessional”, lower interest rate multilateral financing.

According to the Government’s projections, the selected strategy will leave it - by end-June 2028 - with the lowest proportion of debt maturing within one year out of all three options assessed. The average time-to-maturity for debt issues would also be the greatest of the three, while foreign currency debt as a percentage of The Bahamas’ external reserves would be the lowest at 23.5 percent.

“The optimum debt strategy selected through this process seeks to predominantly utilise domestic sources of financing to mitigate foreign currency risk and promote the development of the domestic capital market,” the Government’s debt strategy report said. 

“The strategy also prioritises utilising more fixed interest rate instruments, extending maturities and implementing liability management operations to manage refinancing risk, lengthen the average time to maturity of the portfolio and control interest rate risk, while balancing cost.

“The financing mix that minimises costs and risks of the debt stock suggests gross external and domestic borrowings in the ratio of 20 percent and 80 percent, respectively.” But, in a nod to global stock market turbulence and economic uncertainty caused by Donald Trump’s trade and tariff policies, the Government acknowledged that there may be “deviations from this strategy”.

The Opposition and other fiscal observers are also likely to challenge the Government’s fiscal projections as being too ambitious and optimistic - especially given the 2024-2025 half-year deficit. It will need to achieve its $69.8m full-year deficit target, and meet the projected three consecutive annual surpluses, if it is to hit the forecast $866m net repayment that will cut the national debt by the same amount.

And, even before the recent Trump-instigated turmoil and chaos, the Government was acknowledging that economic growth over the three years covered by the strategy report will be “subdued”. Given that The Bahamas’ consumption-based tax revenues are so closely linked to growth, this could impact the Davis administration’s ambitions to generate $4bn and more in annual revenues in the upcoming three fiscal years.

“Over the three-year medium-term debt strategy timeframe, the economic outlook envisages a continuation of the subdued growth trajectory, with real GDP poised to average an estimated 1.6 percent consistent with the projected long-run potential,” the report said. 

“Enhanced tax administration, combined with targeted tax policy measures and prudent expenditure controls, are forecasted to reduce the overall deficit-to-GDP ratio to the medium-term statutory target of 0.5 percent in fiscal year 2024-2025 and secure surpluses averaging an estimated 2.3 percent of GDP over the medium-term debt strategy horizon.”

The Government is projecting that its chosen debt management strategy, together with successive fiscal surpluses, will see The Bahamas’ debt-to-GDP ratio progressively decrease towards its long-run 50 percent target so that it hits 61.5 percent at end-June 2028. This compares to 81.5 percent at end-December 2024.

This improvement is forecast despite the strategy report conceding that The Bahamas’ economic growth “is expected to taper” to 1.7 percent in 2025, and then “further to its long-run potential of 1.5 percent in 2029 - averaging 1.33 percent for the three years to 2027”. Inflation, though, was forecast to ease to 2.2 percent in 2025 and to 2 percent in 2029 - projections likely made before the Trump tariffs surfaced.

Also sticking to its target 25 percent revenue-to-GDP ratio by the upcoming 2025-2026 fiscal year, the report reiterated the Government’s faith that this can be attained through enhanced tax administration, compliance and enforcement as well as broadening the tax base. It again pointed to the expected annual $140m “in new revenue” from the newly-implemented 15 percent corporate income tax on large multinationals.

“Baseline fiscal assumptions also incorporate the Government’s objective to reduce recurrent expenditure to roughly 20 percent of GDP by fiscal year 2025-2026 through targeted spending initiatives,” the report added.

“Altogether, these objectives are anticipated to secure an overall fiscal deficit of no more than 0.5 percent of GDP in fiscal 2024-2025, consolidating into overall surpluses and primary balances over the medium-term averaging 2.8 percent of GDP and 6.2 percent of GDP, respectively.” The Government is predicting it will generate $1bn-plus primary surpluses, which do not include debt servicing costs, for all three years.

“Refinancing risk is the most prominent risk in The Bahamas’ debt portfolio given the heavy reliance on short-term domestic financing instruments,” the Government’s debt strategy report added. “Efforts are ongoing to maintain the redemption profile of government securities as smooth as possible over the long-term.”

Turning to the distribution of bond maturities and redemptions between 2025 and 2033, it said: “Although the maturity profile for domestic bonds is relatively evenly spaced, there is an increase in refinancing risk associated with external bond maturities in the coming years, which the Government intends to mitigate through buy backs and switch auctions.”

The Government said The Bahamas’ membership of the Development Bank of Latin America and the Caribbean (CAF) will give it access “to a new funding envelope of at least $200m annually” to support climate change, digital economy and infrastructure-related policy initiatives.

It is also assessing the possibility of using “sustainable, green or social bonds” and “sustainability-linked bonds” as new instruments to help raise debt for financing climate change adaptation and mitigation efforts, plus biodiversity protection.