Yesterday in the House of Assembly, when Parliamentarians were debating the Cultural Industries Development Bill 2013, Minister of Finance, Chris Sinckler delivered the finals remarks of the evening on the bond issue that has been a hot topic in recent weeks.
Here is an adapted version of the minister’s speech as delivered last night:
As you and other honourable members are aware, in March this year at the time of the time of the presentation of Annual Revenue and Expenditure, I advised the house that as part of Government’s strategy for financing the 2013/2014 fiscal deficit that there was the possibility that Government would have to access international capital in the international capital markets for about BB$350million.
Following that and in the month of April, a delegation led by myself and including officials from 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 issue if the 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 it seemed a good prospect that Barbados could successful 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 issue was too small or illiquid to attract the level of interest from larger investors in order to command better rates.
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$500million would have to be borrowed, thereby qualifying Barbados to enter the emerging market bond index or EMBI.
Since Barbados would not normally borrow that amount in new cash in one go from 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 maximum US$500million target. To this end, after examining our existing maturity profile, we determined that if we decided to pursue an asset liability management option, the best bonds for that exercise would be those maturing in 2021 and 2022, that between them would be of a total of US$350million.
Given the condition at the time, our financial requirements and the additional buffer which the extra foreign exchange would have given 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 namely because of fears about determination 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 insisting 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 as strong or certain enough.
With this information the market started to settle somewhat and, though not returning completely, were less volatile. Observing this situation and given that the Budget proposals were well received by international investors, Government’s international bond market advisors felt that Barbados could launch the bond successfully, at an acceptable interest rates. We accepted that view and proceeded to conduct a bond issuance road show from September 25-30, 2013 across four key cities – London, Boston, New York and Los Angeles where the key investors in Barbados’ bonds are normally found. Those meetings went generally well, with most investors responding positively to Barbados’ story, expressing support for Barbados’ adjustment programme, which we had outlined in the 2013 budget, hoping for its full implementation.
Unfortunately on September 30th, the US Government shut down as Congress failed to pass a spending bill to finance federal government operations and together with growing apprehension about the possibility of a US debt default behind a failure of Congress to raise the federal debt ceiling limit had led to extreme uncertainty in the international markets, making it clear that the cost of the bond 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 that decision to hold back, very few, if any countries have issued bonds in the market. This situation is not dissimilar to what transpired the last time Barbados went to market for a bond issuance in 2010 and the collapse of the 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 the uncertainties cleared and the markets settled down. Government is satisfied that it has taken the correct decision now as it did then. At the moment no one can predict when the market appetite for emerging market bonds will revive. However, what we can say is that this postponement of the bond issue will not be allowed to offset in any way government’s fiscal strategy. The Government is actively considering alternative finance funding scenarios, and the proceeds of the bond once it is eventually issued, will add to the foreign reserves, which are expected to remain adequate, even in the absence of the bond issue as a result of an adequate fiscal correction.”