Economists skeptical on bond issue’s impact, revenue growth

The Bahamas’ bond issue that closed last week, raising $385 million, can only “paper over” the economic woes faced by this country amidst growing inflation and looming financing needs, an article published by financial news website Global Capital last Thursday contends.

The article paints a picture of skepticism over the Inter-American Development Bank-backed (IDB) bond and worry over the government’s ability to increase the country’s revenue to the degree outlined in its projections.

The Ministry of Finance revealed on Friday, following the publishing of the Global Capital article, that the two-tranche bond placement was oversubscribed with a coupon less than the 13 percent originally suspected.

“On one hand, this was another clear example of an emerging market sovereign in a stressed funding position using a partial guarantee from a multilateral lender to obtain bond market access,” the article said.

“With The Bahamas’ outstanding dollar bonds offering about 13 percent and the government facing mammoth financing needs in coming years, the market should have welcomed the liquidity injection — made possible because the blended cost of the two tranches was lower than what it could achieve with a conventional deal.

“But the government’s 2032 benchmark has actually traded lower since the bond plans were announced, and some investors cautioned against the structure.”

Patrick Campbell, a fixed-income portfolio manager at investment management firm Eaton Vance, explained in the article that while The Bahamas wanted to remedy bond issues with the IDB-backed issue, the dual offer “only worsens the problem and makes The Bahamas an even more difficult curve to understand.”

“Ultimately, this week’s bond issue can only paper over the cracks temporarily unless proposed revenue generating measures materialize,” Campbell said.

The article explained that the country has to experience growth in order to continue funding its debts.

Like the International Monetary Fund (IMF) has done on several occasions, the article suggests that The Bahamas government has been overly optimistic in its revenue projections.

Stuart Culverhouse, head of sovereign research at investment research firm Tellimer Research, said in the article in regards to The Bahamas’ revenue plan: “The mainly revenue-based fiscal consolidation in the 2022/2023 budget may be overly optimistic and the size of the planned adjustment unrealistic. Meanwhile, financing needs are large, amid limited financing options.”

Campbell added: “The Bahamas’ challenge is that the fiscal adjustment plan is based on hope, with growth and revenue projections that look unrealistic, with minimal new taxes and higher spending. The country has huge funding needs and will run into real debt distress at some point if policy doesn’t change.”

The article adds that the ideal position for holders of Bahamas paper is for the country to be backed by an International Monetary Fund (IMF) program.

Emerging market fixed income analyst at Columbia Threadneedle Investments Kate Moreton said in the article that having the IMF as a “backstop” would be an “ideal position” for bondholders.

“I think there is a willingness to pay in The Bahamas, but they are struggling fiscally,” said Moreton.

“At the moment they are trying to fix that in-house and have several ideas of how they might look to raise revenue, but the tough thing is that it relies on growth.

“Also, as an importer of basically everything, they are dealing with severe inflation.”

The government has been reluctant to raise taxes, with Prime Minister and Minister of Finance Philip Davis contending increased taxes will be the government’s last resort to keep the government’s revenue in a respectable position.

Noted Caribbean economist Marla Dukharan has predicted for two years that The Bahamas could enter an IMF program if the country does not make severe fiscal adjustments.

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Chester Robards

Chester Robards rejoined The Nassau Guardian in November 2017 as a senior business reporter. He has covered myriad topics and events for The Nassau Guardian. Education: Florida International University, BS in Journalism

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