Barbados faces the possibility of being shut out of the international capital market due to the Mia Mottley-led Barbados Labour Party (BLP) administration’s decision to suspend payments on foreign debt, one senior economist has warned.
At the same time, Carlos Forte, a former Central Bank of Barbados and Ministry of Finance employee, is advising that the next move by Government should be a restructuring of state-owned entities (SOE).
Forte, who now resides in Canada, told Barbados TODAY while he welcomed Government’s decision to enter into an International Monetary Fund (IMF) programme, he was surprised by the decision to suspend payments on foreign debt.
“I certainly would not have recommended that they do that,” said Forte, in response to Mottley’s June 1 announcement that Government would suspend foreign debt service payments and seek to make interest payments on its domestic debt while negotiating a restructuring agreement with domestic creditors.
“There is a legitimate argument that the domestic debt far exceeds the foreign debt and perhaps you could have limited the debt reprofiling to just domestic debt and by so doing ring-fence the foreign debt from the negative implications from what is in effect a default,” Forte suggested.
Since the announcement by Government, at least two credit rating agencies – CariCRIS and Standard & Poor’s – have downgraded Barbados.
Over the weekend, CariCRIS lowered its ratings on US$300 million in Government debt to CariC on both its foreign currency and local currency ratings.
On Wednesday S&P also followed suit, reducing the island’s long-term foreign currency sovereign credit rating to selective default, down from CCC+ and its long-term local currency ratings to CC from ‘CCC’.
S&P also lowered its long-term foreign currency issue rating on Barbados’ 2035 notes to ‘D’ from ‘CCC+.
Over two-thirds of Government’s debt, made up of loans, bonds and other financial obligations, is domestic, owed to local investors and banks, with the remainder being international debt.
“The announcement of suspension of payments on foreign debt essentially can have the implication of shutting any country out of the international capital market for a considerably long period. We can face the prospect of being shut out of the international capital market for the next ten years but it is not automatic . . . . A lot of it depends on the negotiation with our creditors,” Forte warned.
He said it was “understandable and expected” that international investors would react the way they did when they lowered to almost half the price of their Barbados US dollar bonds, adding that Government’s announcement appeared to have caught creditors off guard.
“It would have helped if the creditors were contacted first,” he said.
Currently, Government averages over $780 million in wages and salaries and just over $1 billion in transfers and subsidies on an annual basis. Grants to individuals and public institutions account for just over $300 million and $700 million annually respectively.
Forte said it was against this backdrop that he welcomed a formal IMF programme, which he said would ensure fiscal prudence and should result in a closing of the fiscal deficit.
In fact, he suggested that Government should have sought IMF intervention two to four years ago.
“You certainly want to go to the IMF sooner rather than later so that you would be in a better negotiating position,” he said while predicting that the country could start seeing some improvements in as little as 18 months to two years, following an IMF deal.
In terms of the SOEs, Forte singled out the Urban Development Commission and the Rural Development Commission as two of the state-owned entities which Government could shed, while stressing the need of reform, which he acknowledged could lead to “some measureable job losses”.
However, he insisted that there should not be any arbitrary ten to 15 per cent across-the-board cut.
“It really should be an examination of the institutions. We have to identify to which extent they are still fit for purpose and ensure that they are streamlined. Those that still have some function, then there are those we probably don’t need anymore,” he said.