External creditors awaiting word from Government on debt-restructuring, have taken a Mohammad-to-the-mountain approach and presented the Mia Mottley Administration with its own proposal for Barbados to consider.
In disclosing this, former Central Bank Governor Dr DeLisle Worrell said it is now over to Mottley and the Barbados Cabinet while strongly warning that a devaluation of the Barbados dollar is still a possibility.
The noted economist argued that while government was successful in securing financial support from two of its major lenders, the threat of devaluation had not gone away.
“A proposal, which meets the Central Bank’s foreign reserve needs, and at the same time, is acceptable to the holders of US-dollar denominated debt, is now in the hands of the Prime Minister and her advisors,” said Worrell, adding that it was now up to government to take the “next step” to ensure that the foreign reserve gains were not lost.
The former central banker said the time Government bought by securing an International Monetary Fund (IMF) agreement and subsequently sourcing funding from the Inter-American Development Bank (IDB) and the Caribbean Development Bank (CDB) should be used to discuss a mutually acceptable deal with US bond holders.
“Prime Minister Mottley’s unprecedented achievement in securing financial support from the Inter-American Development Bank and the Caribbean Development Bank, has averted an imminent threat of devaluation. However, even though the risk of immediate devaluation has lifted, it has not gone away. Loans from the international financial institutions have bought the Barbados some time,” said Worrell, who is said to be an economic advisor to a group of external creditors who are not pleased with Government’s foreign debt restructuring.
“Government must use this breathing space to negotiate a mutually-satisfactory agreement with holders of US dollar-denominated bonds. In the absence of debt restructuring which is agreeable to the holders of those bonds, the threat of devaluation reemerges in three years’ time at most,” he warned.
Late last week Government’s Special Advisor on the economy Professor Avinash Persaud told Barbados TODAY that Government remained resolute in its position that any debt restructuring offer for external creditors would be “similar” to what was recently given to local holders of government paper.
Persaud did not give any indication how soon external bond holders would receive the final offer, but said government was in discussions with them and had been transparent.
However, in his December newsletter, released over the weekend, Worrell pointed to a recent IMF forecast of the island’s foreign reserves to 2023, saying that it showed a drastic decrease in 2021 and 2022.
He did not give a deadline, but argued that unless a favourable agreement was reached with US bond holders, then the prized BDS$2 to US$1 exchange rate could once again be in danger.
“That forecast indicates that by 2023 the Central Bank’s reserves will have fallen to BD$879 million, a gain of less than $200 million in five years. The 2023 reserves level is below the Central Bank’s minimum target of three months of imports. Unless Government negotiates a restructuring of the US-dollar debt, which is satisfactory to all parties, the exchange rate peg will once more be in danger,” warned Worrell.
He explained that should government accept the offer by external creditors the island’s low reserves could be boosted to about $1.3 billion in the next five years.
“A committee representing US-dollar bond holders, has sent to Prime Minister Mottley, a debt restructuring proposal that ensures that the Central Bank holds on to foreign exchange gains beyond 2023. The bank would end 2023 with foreign reserves $1.321 billion. With this level of foreign reserves, the exchange rate peg would be secured,” he said.
“The proposal offered by the external creditor committee would consolidate five US-dollar bonds into a single medium-term issue that would attract a competitive market interest rate. Government would no longer need to repay US$350 million of maturing debt in 2021 and 2022. Barbados’ sovereign credit rating would immediately improve and government and its agencies would regain access to US-dollar loans,” he explained.
Back in late September, Nathalie Marshik, Managing Director and Emerging Market Sovereign Analyst with investment firm Oppenheimer told Barbados TODAY foreign creditors could believe they were being punished if they got a haircut.
Marshik had warned that Government’s debt restructuring offer to foreign creditors could be rejected if it contained terms similar to those presented to domestic bond holders.
“Obviously their key concern is whether there will be a haircut and they are looking very keenly at what is happening with the local currency debt, and thinking that maybe that is what will be happening to them as well,” she said, two days after the Central Bank offered to swap the majority of local debt for new debt instruments.
This would see creditors getting less interest and repayment over a longer period.
At the time the bank insisted that it was the best Government could do under the circumstances, with the alternative being the printing of money and massive lay offs in the public sector in the short-term.