The Big Idea

The Bahamas | Fiscal transparency

Siobhan Morden | July 22, 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 launch of more frequent fiscal updates provides some welcome transparency at an important point for The Bahamas. Fiscal performance through April improved over both official and International Monetary Fund forecasts. This reflects a faster return to pre-pandemic fiscal levels and positive momentum on debt solvency. The strong fiscal data, a nearly full recovery in tourism and lower debt rollover risks argues for better performance on the sovereign debt, still trading at highly distressed yields and lagging the recent bounce in other high yield credits.

Fiscal performance through April should counter some claims of overly optimistic revenue projections and provide some reassurance about spending constraint. The fiscal data through April show a 12-month rolling deficit of $648 million, below the fiscal year 2021-2022 target of $859 million and IMF projections of $1.087 billion. Revenue shows an impressive 75% year-over-year increase against an increase of only 7% year-over-year in spending. The impressive recovery reflects the laggard cyclical recovery. Goods and services taxes have moved up 71% year-over-year through April with a similar 70% year-over-year increase on taxes on international trades and transportation. The spending restraint is near flat in real terms and shows impressive fiscal discipline against a background of latent social pressures and elevated unemployment in the aftermath of the Covid shock.

Leading indicators suggest a mature stage of recovery this year with nearly 90% occupancy for select resort hotels compared to 2019 levels and official visitor arrivals in April 2022 that also equate to 90% of April 2019. The normalization of the tourism industry is much faster than the IMF Article IV projections. This mature recovery bodes well for liquidity and solvency risks so long as policymakers maintain spending restraint and the small, open economy isn’t hit by another adverse external shock. The global stagflationary concerns remains an overhang for an economy disproportionately dependent on tourism and with limited buffers after repetitive shocks.

Debt rollover risks also look manageable with good access to domestic markets and an opportunistic re-entry to international capital markets. The blended high 10% cost of funding is not ideal for medium-term debt dynamics; however, the latest dual-tranche issue with an IDB guarantee shows market access under adverse conditions. For a country without an IMF program, it is important to access innovative external funding and leverage inexpensive multilateral credit. The funding program continues to rely on domestic markets for 57% of their gross financing needs.

The Bahamas Eurobonds have not reacted much to the better-than-expected fiscal performance. The debt has lagged performance in comparable sovereigns such as Ecuador and El Salvador. The newly launched BAHAM’29 priced much worse than expected and also traded lower in the secondary market through unfavorable market conditions. The top relative value pick on the curve is the 9% BAHAM’29 with its high 14.4% yield-to-maturity and strong legal framework (single indenture to the IDB-backed 2036 bond that discourages against default) as well as the residual IDB guarantee and deeply discounted price.

Siobhan Morden
Santander Investment Securities
1 (212) 692-2539
siobhan.morden@santander.us

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Siobhan Morden
siobhan.morden@santander.us
1 (212) 692-2539

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