The Big Idea
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The Bahamas made a clear effort in its latest investor call to improve market communication and reduce the risk premium on its Eurobond curve. The call highlighted strong fiscal performance, friendly market relations, low rollover risks and buffers against external shocks. There is no quick fix for its distressed Eurobond curve. But fiscal discipline and consistent liquidity management should gradually reduce the premium and normalize the curve.
The investor presentation was a polished overview of a country that’s effectively managing the aftermath of successive external shocks. It emphasized high foreign exchange reserves at 8x imports, strong average foreign direct investment at 3.3% of GDP and commitment to ESG programs. The fiscal imbalance and high debt ratios do not reflect the policy mismanagement of other ‘B’ credits but rather the unfortunate circumstances of unparalleled shocks. This is a country with an unblemished track record on debt repayment and high per capita income that excludes eligibility for emerging markets indices. The off-index status is a technical constraint that won’t be resolved anytime soon. It will instead require more active investor engagement and discussion about the fiscal consolidation, the financing program, contingency plans, and prospects for debt liability.
The clear confirmation of absolutely no International Monetary Fund program is meant for one reason – to reassure commitment to honor debt payments. The Bahamas views itself as a high-income country with a reasonable debt sustainability model. The smaller gross financing needs also provides more financing optionality and less dependence on the IMF as a lender of last resort. The typical IMF recommendations also represent radical alternatives between either shock therapy (tax hikes) or debt default. The commitment to pay was further emphasized on the discussion about debt liability management.
There was a lot of focus on the prospects of debt liability management that could include either direct buybacks in the secondary market or blue bond buyback initiatives. The hiring of Rothschild as a financial advisor as well as the creation of a buyback fund ($67 million yearend transfer and $10 million monthly transfer on tax arrears) provides optionality of some type of liability management, especially after the success in El Salvador and potential success in Ecuador. Minister Halkitis mentioned that there was insufficient liquidity to buy back the BAHAM’24s (with illiquid secondary trading on shorter maturity bonds for buy/hold core investors). This wouldn’t rule out a tender buyback operation similar to El Salvador. However, the blue bond alternative seems more realistic for the commitment to ESG transactions.
The onset of the call ruled out any plans for Eurobond issuance with the same funding strategy on either sourcing local markets or multilateral loans. The FY2022/23 borrowing relies upon domestic funding at 56.6% (12.5% loans, 44.1% bonds/bills) and 43.4% external funding (15.9% bank loans and 27.5% IFIs). There was emphasis on the low cost of local funding, the relatively low 13% exposure of bank assets to treasury securities and high 163% average absorption rate of local bonds. The bottom line is that officials believe that local markets remain accommodative without Eurobond financing and still low overall rollover/financing risks.
The fiscal consolidation remains easily on path for program targets this year FY2022/23 after having far outperformed the target last year at $690mn versus $890mn in FY2021/22. There were various inquiries about VAT deceleration and/or prospects for tax hikes. The tax hikes were always viewed as last resort with still emphasis on efficiency gains through compliance, technology, arrears recovery, etc. and medium-term plans for revenues to reach 25% of GDP in FY2024/25.
On risk assessment, the strong external liquidity indicators include high import coverage on FX reserves, an impressive $6bn pipeline of investment projects, a high-end resilient tourism industry and broader efforts to rebuild crisis buffers. The vulnerability to shocks will reduce on the gradual correction of macro imbalances. If the nominal fiscal deficit reaches balance much sooner than FY2024/25, then the quicker the country would lower their vulnerability to external shocks. The potential for pro-active debt liability management would also further improve the liquidity/solvency risks and further benefit curve steepening, especially with the BAHAM’2024 as the buyback candidate. The impressive track record last year on FY2021/22 inspires confidence and validates our bullish view with distressed valuations that still offer ample credit risk premium against shocks and potential for curve normalization.
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