As you and other Honourable members are aware, in March of this year at the time of the presentation of the Annual Estimates of Revenue and Expenditure, I advised the House that as part of the government’s strategy for financing the 2013/14 fiscal deficit, there was the possibility that government would have to access the international capital markets for about BDS$350 million.
Following that, and during the month of April, a delegation led by myself and including officials of the Ministry of Finance, and the Central Bank of Barbados visited our traditional investors and other market players to brief them on developments in the country, conduct our annual surveillance exercise on existing market conditions and ascertain the potential for a Bond issuance if Government decided to go that route.
Market conditions were deemed to be favourable: interest rates were at historic lows and investors appeared to have a healthy appetite for emerging market debt. The responses we received were therefore encouraging and there seemed a good prospect that Barbados could successfully do an issuance.
Government was, however, mindful of the fact that in 2010, even with an investment grade rating, Barbados was made to pay a higher rate given the unpredictability of the market then, and more importantly, because our bond issuance was too small (or illiquid) to attract the level of interest from larger investors in order to command better rates.
Indeed, the advice given to us then, and which we knew from our own experience in the market before, was that if Barbados wanted to have any realistic chance of attracting better rates in the market a minimum of US$500 million would have to be borrowed, thereby qualifying Barbados to enter the Emerging Market Bond Index (EMBI).
Since Barbados would not ordinarily borrow that amount of new cash in one go from the capital markets, we were advised, and we concluded from our own analysis, that we could only reach that target by executing an asset liability management exercise in which we would buy back or exchange existing Bonds of an appropriate value, add those to a new cash issue and raise the requisite capital to achieve the minimum US$500 million target.
To this end, after examining our existing maturity profile, we determined that if we decided to pursue the asset liability management option the best Bonds for that exercise would be those maturing in 2021 and 2022 and that, between them, were of a total value of US$350 million.
Given the conditions of the market at the time, our financing requirements and the additional buffer which the extra foreign exchange would give to our reserves going forward, as we implement our fiscal consolidation adjustment programme, Government decided to move ahead with the issuance.
However, in the interim since the visit with investors in March, the international market had soured for emerging market debt, mainly because of fears about the termination of quantitative easing by the US Federal Reserve in the US economy, and the impact that would have on global liquidity. Interest rates began to inch up and uncertainty became a central feature in the markets.
A few months later, the US Federal Reserve Chairman, reversed the previously issued guidance to the market by indicating that the US Central Bank would in fact continue its policy of quantitative easing, since, as he put it, the recovery in the US economy was not strong or certain enough. With this information, the markets started to settle somewhat and though not returning completely, were less volatile. Observing this situation and given that the budget proposals had been well received by international investors, Government’s international bond advisors felt that Barbados could launch the bond successfully and at an acceptable interest rate.
We accepted that view, and proceeded to conduct a Bond issuance “Road Show” from the 25th through the 30th of September across four key cities (London, New York, Boston and Los Angeles) where the key investors of Barbados’ Bonds are normally found. Those meetings went generally well, with most investors responding positively to Barbados’ story, and expressing support for the adjustment programme which was outlined in the 2013 Budget, hoping for its full implementation.
Unfortunately, on the 30th of September the United States Government shutdown as its Congress failed to pass a spending Bill to finance federal government operations and together with growing apprehension about the possibility of a U.S debt default behind a failure of Congress to raise the Federal debt ceiling limits, have led to extreme uncertainty in the international markets, making it clear that the costs of the Bond issue would be unacceptably high. Government’s Bond managers have, therefore, advised that the offer be suspended until more favourable market conditions emerge. Since Barbados and other issuers took decisions to hold back, very few, if any countries have issued Bonds in the markets.
This situation is not dissimilar to what transpired the last time Barbados went to the market for a Bond issuance in 2010, and the collapse of some European economies hit the markets. Barbados, like many others, was forced to put off decisions to enter the market until later in the year when uncertainties cleared and the markets settled down a bit.
Government is satisfied that it has taken the correct decision now, just as it did then.
At the moment, no-one can predict when market appetite for emerging market Bonds will revive. However, what we can say is that the postponement of the Bond issue will not be allowed to off-set in any way Government’s fiscal strategy. The Government is actively considering alternative funding scenarios and the proceeds of the Bond, once it is eventually issued, will be added to foreign reserves, which are expected to remain adequate even in the absence of any bond issue, as a result of an adequate fiscal correction.