Private sector financing continues to dry up, with some of this island’s major investment management firms today publicly signalling their decreased appetite for Government securities out of fear that the Freundel Stuart administration could soon default on its debt.
Earlier this year the Central Bank of Barbados reported that despite a very liquid financial system commercial banks were holding fewer Government papers.
And with the Stuart administration currently struggling to bring its finances in line amid an overall debt of about 140 per cent and a high fiscal deficit of about six per cent of gross domestic product, some of Barbados’ most reputable investment firms today indicated that they were very cautious about investing in Government securities given the level of debt and subsequent downgrades, suggesting that it was now a matter of when Government would default on its debt payments.
Addressing the fourth annual Eckler investment review seminar at the Lloyd Erskine Sandiford Centre, Senior Investment Analyst at Sagicor Asset Management Inc Nicolette Blackett said her company would be avoiding Government papers, given the current situation.
She explained that returns on the company’s investment in Government bonds had been low in recent times.
“Actually, as at the end of September it is at 1.52 per cent. So of course it is not doing that well this year and that again is because the majority of it is in the Barbados Government debt. So as the ratings deteriorate, this fund will also deteriorate,” she said of the company’s preferred income fund invested in Government bonds.
In terms of its outlook, she said: “We [Sagicor] obviously know the conditions here in Barbados so we continue to address these conditions and we also make the decision for our mutual funds. We are not taking any more lump sums . . . and also in terms of the challenging times, we are just not investing more in the Government of Barbados debt and we are just going to manage that situation,” Blackett said, adding that the company would continue to seek out international investment options for higher returns.
Meanwhile, Vice President of Royal Fidelity Merchant Bank & Trust Jillian Nunes also pointed to the high Government debt and low credit ratings, saying that situation was being closely monitored.
“We see some economists are forecasting that there might be another such downgrade before the end of the year. In justifying that we see the same unaddressed issues,” she said, pointing to the high Government debt and low appetite from private sector for government papers.
Nunes also recalled the announcement earlier this year by Minister of Finance Chris Sinckler that he was in negotiation with the National Insurance Scheme to engage in a swap programme to issue longer dated and lower interest bearing securities in exchange for those the fund holds. By doing this, it lessens the amount of interest Government has to pay and the burden that imposes.
“I don’t believe he has made any progress with that initiative, but that is exactly the kind of programme that we remain on alert for as the potential [for it] to extend to our bond holders still exist. As such we remain very cautious of Government of Barbados debt. Last year we made the exemption for Treasury bills . . . this year we are not occupying that space either,” Nunes said.
In its latest downgrade of Barbados’ credit worthiness, international ratings agency Standard and Poor’s (S&P) said amid high current account deficits and limited external inflows, external liquidity has been weakening.
“The decline in international reserves reduces Barbados’ capacity to defend the currency peg and increases the risk of a balance of payments crisis,” S&P cautioned, while lowering Barbados’ long-term local currency rating to ‘CCC’ from ‘CCC+’ and affirming its long-term foreign currency sovereign rating at ‘CCC+’, with a negative outlook on both ratings.
The negative outlook, S&P said, “reflects the risk of a downgrade given difficulty turning around fiscal policy (with parliamentary elections in 2018), a possible domestic debt exchange could be a default under our criteria, and prospects for a balance of payments crisis”.
Principal and Consulting Actuary with Eckler Ltd Lisa Wade told Barbados TODAY that given the current situation those who invest in Government bonds could get lower returns, which would result in individuals or investment firms having “a harder time trying to make up that difference of shortfall in funds.
“So it does impact everybody,” she said.
Explaining that it was more difficult for Government to borrow at favourable rates on the international market, Wade said a situation was created in Barbados where “either bills won’t get paid, or taxes would have to be raised”.
Yesterday, officials of Fortress Fund Managers also expressed limited appetite for Government papers, saying the recent downgrade was one of serious concern for investors.
“I think downgrades are a concern obviously for everyone, particularly for investors like ourselves. It means that [Government’s] ability to repay and honour the debt repayments when they come due is clearly a concern to the ratings agency and by extension, ourselves as investors. So it is a concern,” Investment Director of Fortress Roger Cave said.
Concerned about the situation, one reputable economist, who did not want to be identified by name, expressed concern that the island was being forced into a formal arrangement with the International Monetary Fund (IMF).
In fact, he said the current situation was simply “not good” with “foreign banks, collecting Bajan deposits and paying next to nothing in interest while forcing Government into an IMF programme.
“It is not like the Government is running massive deficits. They are actually trying to cut the deficit,” he said.
Minister of Finance Chris Sinckler could not be reached today for comment on the matter. firstname.lastname@example.org