“I can’t understand how Barbados is going to access the international markets after this default. They will have to convince the international community,”
– Yanique Leiba-Ebanks, Assistant Vice-President for Trading and Business Development, Sterling Investment Limited, Jamaica Jamaica Gleaner, Sept 3, 2013
On June 5, 2018, in an article titled Suicide by default in this space, the opinion advanced was that the decision by the current Barbados administration to selectively default on paying its external debt was going to come back to haunt the country in short order and just last week, this column also made note of comments from the Canadian press that CIBC First Caribbean had endured some impairment and was cautiously observing the next steps by the administration in light of the Barbados Government’s USD $500 million liability to the bank.
This week we have seen that contagion spread to Jamaica where Sagicor Group Jamaica Limited and Victoria Mutual Limited both reported quarterly impairment in their June disclosures and put the blame squarely on the shoulders of the Barbados Government’s decision to default on its external debt payments as the reason.
Interestingly enough, Sterling Asset Management which opted not to trade the Barbados sovereign bonds showed year-on-year profit improvement from $J43 million to $JM52 million. The team from Sterling believes the only way forward for the Barbados Government to correct the weakness in the economic model is to take a series of actions that include what they see as correction of the artificial 2:1 currency peg Barbados enjoys against the US Dollar, by devaluation, in doing so, thereby making its tourism product more financially competitive to drive the industry and fuel foreign direct investment.
This selective default contagion goes further than financial companies. With the amendments to the International Financial Reporting Standards 9 (IFRS 9). Any commercial entity must show early recognition of impairment losses on receivables and loans, including trade receivables and investments in bonds. Entities will have to start providing for possible future credit losses in the very first reporting period a loan goes on the books even if it is highly likely that the asset will be fully collectible. In the past auditors allowed for the exclusion of Government receivables from impairment as it was seen as ‘solid’ though perennially late. Under the new rules this is no longer the case, consequently the large debt and or investments in sovereign bonds being carried by banks, financial institutions, non-financial corporations and local commercial firms will undermine their financial reporting and in turn reduce the Government revenues on corporation tax. The country would take note that the corporate tax rate was increased by five per cent in the recently passed Mini-Budget to move it to 30 per cent. With the approximately $250 million owed to the commercial sector this will make a huge difference in the revenue projections for corporate tax collection.
The Jamaican financial community is hopeful that Barbados will resume payments after an arrangement is worked out with the IMF. But what would compel any investor to take the risk on Barbados’ sovereign debt after this? Jamaica has a robust investment community and its populace has a very high financial portfolio IQ that we in Barbados could do well to learn from and replicate. Government bonds are ‘usually’ taken up as blue chip and regularly oversubscribed. We truly have to ask ourselves, if the electorate has the kind of faith espoused by so many pundits, why should external markets invest in Barbados sovereign debt when Barbadians themselves do not? Barbados has more than $12 billion dollars, over two times its GDP sitting in commercial banks ($9.1b); non-bank financial companies ($1.6b); credit unions ($1.7b) getting a paltry interest rate of less than 1 per cent on the largest percentage of that money. This figure of $ 9 billion has been constant for more than ten years. If the election result is any indication of confidence in the current administration why is there not a move to have Barbadians demonstrate that faith in the new administration by issuing a major bond primarily for local consumption to significantly reduce the crippling debt we find ourselves in.
Sovereign debt as its name suggest is issued by national governments in the form of bonds, sovereign bonds are generally among the safest investments as most countries want to be able to continue borrowing, so they generally make a high priority of paying back debt. Even if countries are not particularly credit worthy, their sovereign bonds are usually safer than other domestic alternatives. In a scenario where the government is defaulting on its debt, it is unlikely that the country’s other stocks, bonds or currency markets are doing well. The current bank deposit rate in Barbados on aggregate is 0.3475 per cent. Any figure above one per cent on a sovereign bond is therefore better than that.
In Shakespeare’s tragedy, King Lear, an aging Lear has three daughters, one of whom loves him very much. His other two daughters pay him lip service while secretly plotting to be rid of him. As the play begins, Lear is going to step down as king. He plans to divide the kingdom in three unequal parts, but his daughters must prove their love for him to gain the most. The two who plot against him do so easily, as they know how to flatter him and gain his affection. The third daughter who loves him dearly however, does not engage in flattery. Upset by this, Lear banishes her. The two daughters imprison the old king and the banished daughter returns in an attempt to free him. This story resonates as we watch an adoring civil service now being tortured by daily pronouncements of a number of you are going to be severed. It is almost like being on death row and being told, we are going to carry out the sentence soon. The irony of this is that this same government who is on record stating that retrenchment will be a last resort have taken the option as first resort with the promise of a soft landing and retraining.
This is not rocket science as the wage bill is 25 per cent of total government expenditure. The question most thinking people would have is why would a decision be made to raise the salary of the public service by five per cent effective August 1 for the period April 1, 2018, to March 31, 2019, at a cost to Government of $60 million and then retrench 1,000 of those very same workers the following month? The retrenchment being taken to obviously reduce the Government’s wage bill which was just increased by $60 million. The obvious follow on question, will be how many more will go home to first recover the $60 million dollar increase and then reduce the Wage and Salaries component of the expenditure to the more acceptable 20 per cent recommended by the IMF and the economic team? The estimate is another 4,000-5,000 over the next two years coupled with a robust early retirement programme.
A debt restructuring as is currently planned by the new administration occurs when a government anticipates difficulty in repaying its debt as planned, and therefore comes to an agreement with bondholders in order to renegotiate the terms of the bonds. These changes can include a lower rate of interest, longer term to maturity or reduced principal amount. These restructurings are done to benefit the bond issuer and are almost always negative for bondholders, except to the degree that they prevent a default. The suggestion is that Barbadians become very active and educate themselves on how to manage financial portfolios to help this administration and the country as a whole have a softer landing and even perhaps save some jobs that would impact the social construct of the island.
Barbadians should therefore stand up and put their money where their mouths are, unlike the two daughters of King Lear, and support this new administration by a robust uptake of a Barbados sovereign bond that will attract little external attention and could be the path to saving the country from further fiscal deterioration.
There is nothing to celebrate here and there is certainly no pleasure in having our beloved country in the news for the reasons mentioned before. My Jamaican cohorts have long held the view that Barbados is too small, too expensive and too proud to maintain its position as a leader in the region. Our collective actions appear to herald their prophecy and we really need to step back and see the world as it really is and not as we would like it to be in order to mitigate the damage done and eventually reverse it.
George Connolly is CEO of Business Technology Solutions Firm and a former candidate of the Democratic Labour Party.