The Big Idea
The Bahamas | Cyclical recovery
Siobhan Morden | February 4, 2022
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
The Bahamas public credit department released another review of the country’s fiscal strategy and medium-term debt management. The transparency is welcome, especially with rollover and liquidity risks in the Bahamas large financing program. Debt management remains critical. The country still relies on funding from multilaterals and domestic markets and depends on economic recovery to stabilize a debt burden now at 100% of GDP. At current valuations, however, there is enough compensation to buffer these risks.
It has been a slow drift wider on credit spreads. The country is sensitive to weak externals. The mostly passive cyclical adjustment is not sufficient to immunize against external contagion, especially on the relapse of Omicron over the past few months. The curve is now trading at a premium to comparables like Ecuador, with distressed double-digit yields and the highest yielding regional credit next to El Salvador and Argentina.
The Bahamas is vulnerable, especially with its high dependence on tourism as a small open economy. The latest central bank data show an early recovery in tourism though November that has been mostly focused on air arrivals with sea traffic still slow. This coincided with a full re-opening of the economy and elimination of restrictive curfews on November 13, 2021. However, the latest central bank data does not show the resurgence in Omicron in December through January and an upgrade of the US travel advisory to Level 4 last month. Vaccination rates in the Bahamas remain low relative to the rest of the region. The pandemic aftershocks explain the conservative path for economic recovery and a reluctance to embrace counter-cyclical fiscal austerity. The unemployment rate is stubbornly high, estimated at 15.2% in fiscal year 2021. It is a slow turn on economic activity and, consequently, fiscal performance. The central bank reaffirms that “projected revenue shortfalls should persist, with expectations that taxable economic activity would recover to pre-pandemic levels in sync with the tourism recovery.”
If the worst is soon over for pandemic variants with global vaccinations and herd immunity, then perhaps this will allow for a more sustainable recovery in tourism. That would support a projected 8% GDP rebound in 2022 after only an estimated 2% tepid growth in 2021 and 14.5% decline in 2020. The path for debt sustainability assumes a balanced budget in fiscal year 2024 based on mostly optimistic revenue projections. Although the headline fiscal targets remain relatively unchanged, there was an upward revision on both revenues and spending through the 5-year projection timeframe. The increase in revenues from 18.2% of GDP in fiscal year 2018 (pre-shocks) to 25% of GDP in fiscal year 2025 seem optimistic. There is significant estimation error on the revenue neutral projections of VAT cut from 12% to 10% that’s offset with reduction in VAT exemptions and higher revenue based on efficiency gains of audits and technology upgrades. These optimistic projections would not necessarily compromise overall performance if a shortfall on revenues would logically just curb the upwardly revised spending projections. This will require proactive management to restrain spending and commitment to fiscal discipline aligned to their medium-term framework. It’ll be important to establish credibility on what remains a gradual path towards fiscal balance.
The debt funding strategy should diversify away from Eurobond markets with the 2023-2025 projections seeking two-thirds of funding from domestic markets and the remainder from multilaterals. There are no plans to seek funding from the Eurobond markets. The debt liability strategy also includes a reduction in the stock of treasury bills to lengthen the debt maturity profile. The current distressed Eurobond yields do not suggest market access with the public debt team having previously announced a shift in their funding strategy towards lower cost of multilateral, green financing alternatives and domestic markets. This does not rule out an IADB collateralized issuance similar to the social bond in Ecuador that diversifies the investor base and reduces the overall cost of financing. There has been reaffirmation to honor external debt with low 2% of GDP in annual coupon payments and no amortizations until $300 million in January 2024 for a lengthy Eurobond maturity profile. The 10% and higher yields now offer significant premium after what appears the worst of the pandemic aftershocks and manageable rollover on only near-term Eurobond coupon payments. The Bahamas high beta status and mostly passive fiscal strategy has been a disappointment on year-to-date -3.4% EMUSTRUU total returns; however attractive valuations and higher carry offer a significant buffer on momentum for an economic recovery and active debt liability and financing management.
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