By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A major Canadian bank says the Government’s six-month fiscal outturn “casts some doubt” on whether the full-year $69.8m target will be met while also voicing concern over its “elevated roll over risk”.

CIBC, in its April 2025 Caribbean Market Overview, said the Davis administration’s ever-growing reliance on short-term bonds with maturities of one-year or less to meet its debt funding needs is increasing its exposure to one, or a number of, large investors potentially demanding that their principal be repaid rather than agreeing it be refinanced.

The bank, which has a significant commercial and international financial services presence in The Bahamas, said the Government’s escalating reliance on short-term debt to cover its deficit and funding needs was exposed during the six months to end-2024 because, while net bond debt grew by $91.5m, the gross value of one-year bonds issued during that same period hit $157.9m.

And the CIBC report also confirmed previous Tribune Business reports that the Government drew down on $161.5m set aside to meet future foreign currency bond repayments to instead meet its immediate financing needs during the first-half of the current 2024-2025 fiscal year.

“Government financed its operations during the six-month period using sinking fund withdrawals of $161.5m and net new debt of $434.9m, pushing total direct debt to $11.75bn or 79.2 percent of GDP at December 2024,” CIBC said.

“Domestic debt climbed $376.5m to $6.63bn, largely reflecting an upswing in Central Bank advances ($169m), and higher net issuance of Treasury Bills ($117.8m) and bonds ($91.5m). However, of the $91.5m increase in bond holdings, bonds with a maturity of one year or less rose $157.9m, highlighting Government’s elevated roll-over risk associated with domestic debt.

“External debt rose $58.4m to $5.12b as repayments on bilateral, multilateral and commercial debt partly offset new commercial borrowing.” CIBC acknowledged The Bahamas’ debt-for-nature refinancing in November 2024, which enabled the country to generate $124m in interest savings dedicated to marine conservation over a 15-year period by swapping higher cost debt for lower-cost funding.

However, given the $139.3m year-over-year increase to a $398m deficit for the six months to end-2024, CIBC added its voice to those predicting that the Government will likely overshoot its $69.8m full-year deficit target given the magnitude of the near-$330m surplus it needs to now achieve in the half-year to end-June 2025.

“Greater spending, largely on good and services and interest payments, outweighed an expansion in tax collections,” the Canadian bank added. “Following a 1.3 percent of GDP fiscal deficit in fiscal year 2023-2024, Government is targeting a 0.5 percent of GDP deficit for the current fiscal year 2024/25.

“While the half-year fiscal performance does cast some doubt on whether this outcome can be achieved, Government remained confident in its mid-year Budget review that it still expects to meet the fiscal target. Government also enacted the Domestic Minimum Top-Up Tax (DMTT) Act in November 2024, in line with the OECD’s Pillar Two Framework, which is expected to generate additional revenue of $140m annually.”

CIBC, though, is forecasting that the Government’s actual 2024-2025 deficit will come in just over a full percentage point of GDP higher at 1.6 percent. This, if such an outcome is realised, would place the fiscal deficit at just over $200m and some $140m-$150m higher than target.

And it is also predicting that the Government will not achieve its planned Budget surplus, where revenue income actually exceeds total spending, as projected in the upcoming 2025-2026 fiscal year although the deficit will be much reduced at 0.4 percent of GDP - around $56m. This stands in contrast to the Davis administration’s projection of a $448.2m, or 2.9 percent of GDP, Budget surplus.

Kwasi Thompson, the Opposition’s finance spokesman, yesterday asserted that the CIBC report “highlights several troubling aspects of The Bahamas’ fiscal management that reflects persistent weaknesses in public financial governance”. He warned, in particular, about the “substantial rollover risk” identified by the Canadian bank as well as whether the Government is in compliance with the law on the use of ‘sinking funds’.

Section 56 of the Public Finance Management Act states that the minister of finance shall disclose in the annual Budget the government securities and loans to be redeemed from the sinking funds, which were established as vehicles for the Government to accumulate foreign currency assets that would finance repayment of external bond issues when they mature.

Mr Thompson, though, is arguing that the $161.5m drawdown during the 2024-2025 Budget year’s first-half was never previously disclosed as required by the Act. “Our concern is that the Government is not following the law with respect to the sinking funds,” he told Tribune Business.

“The law is clear. If the Government wishes to use the sinking funds, which it has the right to do, they must say this to Parliament in advance of the Budget period. The law stipulates that ought to be done, and when the May Budget was passed there was no mention of it being used, and when the mid-year Budget was passed there was no mention of those being used. 

“The Government must follow the law and be transparent when it comes to its fiscal affairs. That was our main concern with respect to the sinking funds.” The Ministry of Finance’s report on fiscal activities for the 2024-2025 budget year’s first half and second quarter disclosed that just $100.3m remains in the so-called ‘sinking funds’.

“For the review quarter, drawings on the sinking funds totaled $161.5m,” the report said of the three months to end-December 2024. “On a cumulative basis, the four sinking fund arrangements earmarked for scheduled retirement of external bonds, along with the Goldman Sachs repurchase agreement, held a value of $100.3m, of which $92.3m is subject to the repurchase agreement....

“In financing activities, the balance under the net acquisition of financial assets was a negative $161.5m as the Government utilised sinking fund proceeds to assist with meeting debt obligations. Additionally, net borrowing stood at $451.1m [for the 2024-2025 half-year] compared with a year-earlier $33.7m net repayment position.”

Previous Ministry of Finance reports revealed that, at end-June 2023, the same four ‘sinking funds’ held a total $378.6m in total assets, of which some $141.3m were covered by the February 2022 repurchase agreement with the Goldman Sachs. That saw the Government pledge more than $200m worth of sinking fund assets as collateral security for a foreign currency cash advance from the investment bank.

Based on those figures, the Davis administration has over an 18 month period employed a net $278.3m, representing 73.5 percent or almost three-quarters of ‘sinking fund’ assets at end-June 2023, to cover its fiscal deficits and meet current - rather than future - debt obligations. In effect, it has been using assets held for future benefit to meet current needs, and not necessarily for the purpose for which they were accumulated.

Elsewhere, Mr Thompson told Tribune Business: “According to the report, despite a 10.4 percent year-on-year increase in tax revenue - primarily from higher departure taxes linked to cruise tourism - the Government’s fiscal deficit widened by $139.3m in the first half of fiscal year 2024-2025, reaching $398m.

“The expansion in revenue was outweighed by a 17.8 percent surge in public spending, notably on goods and services, interest payments and subsidies. Most concerning, the report notes that debt-financed expenditure pushed total direct government debt to $11.75bn or 79.2 percent of GDP as of December 2024, with domestic debt increasing significantly through Central Bank advances and short-term Treasury Bills.

“The heavy concentration of borrowing in short-duration instruments raises substantial rollover risk. These indicators, drawn directly from the CIBC Caribbean analysis, point to a government grappling with structural fiscal imbalances and resorting to reactive measures rather than implementing meaningful long-term reform.”

However, Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business last year that greater reliance on short-term Bahamian dollar government bonds has imposed greater fiscal “discipline” on the Davis administration, forcing it to be more transparent and accountable, while also benefiting taxpayers and the wider economy through reducing its borrowing costs.

He explained that the need to refinance almost 38 percent of its total Bahamian dollar debt during the current 2023-2024 fiscal year has imposed “guard rails”, which prevent the Government from engaging in reckless spending or other irresponsible financial actions, because doing so will undermine local investor confidence and potentially cause such rollovers to fail.

And, with Bahamian banks, insurance companies, pension funds and other Government bond buyers increasingly showing appetite for paper with maturities of five years or less, Mr Bowe told this newspaper that such trends are benefiting taxpayers because shorter-term debt typically attracts a lower interest coupon than the 20 and 30-year variety.