The Big Idea
The Bahamas | Outperfomer
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The Bahamas seemed misaligned relative to comparable ‘BB’ sovereigns to start the year, likely in part to its out-of-index status. But attractive premium matters in a market with historically tight emerging markets valuations and a low stock of bonds that does not rely on index demand. The Bahamas has recently outperformed El Salvador and is trading inside Colombia, making it one of the top performers to start the year.
The Bahamas started the year with favorable technicals as the widest ‘BB’ credit within the region. There has since been a divergence trade with ‘B’ credits (notably El Salvador) and a convergence with ‘BB’ rated similar credits with the Bahamas trading inside Colombia. The benchmark BAHAM’36 now aligns with Brazil and the Dominican Republic and invites the debate about tighter spreads from scarcity value versus wider spreads from the out-of-index penalty. The Bahamas still trades wide to less liquid credits but also probably should offer a spread premium considering the rating differential of the ‘BB-‘ composite ratings against the investment grade potential of Costa Rica and Guatemala.
The fiscal data reaffirms the slow process for consolidation. The latest data through September show the small nominal fiscal deficit slowly shifting towards balance. There has been an impressive adjustment from a worst pandemic deficit of 12% of GDP to a much smaller fiscal deficit of 0.5% of GDP through the June 2025 fiscal year. The 12-month rolling fiscal deficit through September has narrowed to 0.2% of GDP against the full year target of a nominal surplus of 0.5% of GDP. This seems reasonable under the current trends of spending restraint, efficient tax collection, above trend GDP growth and the newly effective corporate income tax.
There have been no signs of reversal after the spending cutbacks in the final months of FY2024/25. There isn’t much if any additional budget flexibility for additional spending cutbacks. The higher revenues should represent the adjustment mechanism at a mature phase of the fiscal consolidation cycle. The structural fiscal target requires additional fiscal adjustment of 2% of GDP over the next two fiscal years. The tax revenue has been impressive across all categories including VAT, property tax and tax on international trade and transactions. The FY2025/26 budget estimates around $130 million from the tax on income, profits, and capital gains with no revenues yet from July through September. This incorporates the domestic minimum top-up tax on multinationals in compliance with OECD standards. This alone would deliver the 0.8%-of-GDP adjustment to reach the fiscal target this fiscal year. The final phase will have to lean aggressively on budgetary efficiency to reach the 1.7% of GDP nominal fiscal surplus.
This adjustment cycle is the most impressive across the region and validates the upward rating momentum into the ‘BB’ category. The cycle of additional rating upgrades will require the final phase of adjustment next year and the faster reduction of the debt ratios below 70% of GDP closer to other ‘BB’ credits. The IMF estimates that a primary surplus of 5.5% of GDP by FY2025/26 and to 7% of GDP by FY2028/29—would bring the debt to 50% of GDP by FY2030/31 (Bahamas long-term objective). There may be some latent concerns about the sensitivity to climatic shocks; however, there has been efforts to source contingency funds from multilaterals (IDB for $160mn) as well as build domestic contingency funds. The higher credit ratings would also suggest broader financing flexibility to counter any future adverse shocks. The sooner that the Bahamas reduces its gross financing needs towards 50% of GDP, then the sooner the country broadens the policy optionality to manage shocks or safeguard against them with higher contingency funds and a cycle of further rating upgrades for tighter credit spreads.
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