The Government’s debt restructuring exercise may have shattered investor confidence in buying Government securities in the future, a noted economist has said.
And Jeremy Stephen is predicting that the Government’s parlous finances are threatening the future pensions of civil servants.
Stephen has predicted that unless Government increased the amount of Government paper commercial banks are required to hold, banks would buy the “bare minimum” while individuals may not even want to consider any in the future.
He is already forecasting that Government will need to embark on a second round of refinancing if Barbados fails to attract enough foreign direct investment to help ease the island’s money woes.
“Chances are we should be expecting some other form of refinancing within the next few years even with [International Monetary Fund] financing because like others have said, US$200 million plus is not enough to begin to fix our problems,” said the economist yesterday in a Facebook post of the US$290 million-dollar Extended Fund Facility made available to support Barbados’ balance of payments.
Government has embarked on a debt restructuring exercise where holders of Government instruments – treasury bills, notes and debentures – are to get an exchange for new ones at slashed interest rates and longer maturity period.
The deadline to accept the exchange offer was October 5.
Stephen slammed the new debt instruments on offer as “crappy”, and expressed disappointment that Government did not better explain its plans earlier.
“This is the problem. When your interest has gone down and your principal is stretched out even further, effectively you are getting way less money in today’s term than if you had the chance to recycle it. . . given time value of money,” he explained, adding that this was due mainly to inflation.
Government would therefore have a difficult time convincing commercial banks, insurance companies and individuals to invest in Government papers in coming years, he said.
“I am telling you right now these guys [commercial banks] will put in the bare minimum and then personally individuals will put in even less than they did before, you might not even find a single individual coming in,” he predicted.
Despite displaying a low appetite for Government paper for some time, from January 1 this year commercial banks were required to hold 20 per cent of their deposits in stipulated securities.
Stephen, who expressed sympathy for pensioners affected by Government’s debt restructuring, said his worry now was “the next round of investment” that would be required.
He explained that the loans from the IMF, the Inter-American Development Bank and the Caribbean Development Bank were for specific purposes, and therefore Government could still face a long-term problem of financing its various social programmes and meeting monthly obligations on time including paying salaries if the country did not start to attract more direct foreign investment.
“That to me has the larger long-term problem,” said Stephen, who is also predicting that public workers under age 45 are no longer guaranteed a pension.
“My major concern then is suppose the [foreign direct investment] does not come in when you want it to come in, you can almost guarantee that given conditions today everyone of you under age 45 should not look for a Government pension,” he said.
But while the announcement late last week of a fundamental policy shift from tight currency control to the planned relaxation, “made sense”, Stephen questioned if enough research was done prior to the announcement.
“If you have a case where people are not faithful or don’t believe in what the Government can do over the next few years then liberalizing exchange rates leads to devaluation,” he warned, adding that it was therefore in the country’s best interest to really ramp up its exports and attract more foreign direct investment.