International credit rating agency Moody’s expects the government’s gross borrowing requirements will likely hit $2 billion as the fiscal deficit widens to 11 percent of gross domestic product (GDP), explaining that the recently closed $600 million foreign currency bond will meet one-third of government’s needs.
Moody’s, in its latest report on The Bahamas, stated it expects the government to source $700 million from multilateral lenders and about $700 million in the domestic environment.
“Even if there is a degree of under-execution in the capital expenditure plan, the fiscal deficit will widen substantially, reaching 11 percent of GDP in 2020/21 and pushing gross borrowing requirements to 16 percent of GDP, or around $2 billion, given the debt repayment schedule,” Moody’s stated.
“We estimate the proceeds from the 2032 bond (around $588 million as it was placed below par) will cover around one-third of the government’s borrowing requirements.
“Although domestic financing sources should be sufficient for the government to meet its financing needs – including rolling over debt that comes due in 2020/21 – we assume the government could under-execute its large capital expenditure budget if required to ensure financing requirements remain manageable.”
Moody’s said the government’s foreign currency bond, while dispelling doubt about The Bahamas’ ability to raise money in international markets, places the country in position to suffer poor optics in terms of its interest burden metrics.
“While the 8.95 percent coupon is considerably higher than what the sovereign has paid in previous issuances, the rate on the new bond is close to the yield of its other bonds, which currently stands at around 8.5 percent,” the report states.
“The rise in interest payments will have a detrimental impact on The Bahamas’ interest burden metrics, which are already weaker than those of most Ba-rated peers (the median interest/revenue ratio among Ba-rated sovereigns was 9.7 percent in 2019, compared with The Bahamas’ 13.5 percent).”
The rating agency added that although the bond will support foreign exchange reserves at The Central Bank of The Bahamas, offsetting depressed tourism receipts, it found that the country’s $2.1 billion reserves were robust before the bond.
“While the proceeds from the 2032 bond will buttress reserves at the Central Bank, reserves had been resilient even before the bond was issued,” Moody’s stated.
“Indeed, as of August, gross reserves amounted to $2.1 billion – almost $400 million more than the balance at year-end 2019 and equivalent to around 11 months of our expected 2020 merchandise imports. Central Bank data ascribes this resiliency to other international borrowing from the government and domestic banks.”