Billion dollar savings

With Government now reaching a deal with external creditors, the country is expected to save around $1 billion over the next four to five years.

As a result, economists are predicting more wiggle room for the Mia Mottley administration to address critical social issues, and an improvement in the country’s credit ratings in coming months.

Special Envoy on Investment and Financial Services to the Prime Minister Professor Avinash Persaud told Barbados TODAY the debt restructuring was critical since Government would have had to borrow more to repay its debt if it had not defaulted.

Explaining that the “burden of economic adjustment” was being shared evenly, Persaud said the savings not only protect the island’s foreign reserves, but also created a fiscal space for financial resources to be put “to improving the lives of Barbadians”.

“We are spending money on new buses, new garbage trucks, refurbished hospital and schools, new south coast sewage systems, for more judges and police officers, and this is one place, these savings, in which the funds will come from,” he said, adding that the debt restructuring had to be part of stabilising the economy and protecting the dollar.

“Once this deal is signed, Barbados will no longer be in default. Our credit ratings will begin to rise, helping us march to a strong recovery and growth,” he predicted.

Immediately after coming to office on May 24, 2018, Government defaulted on the country’s debt, which had reached a staggering and unsustainable 175 per cent of gross domestic product.

In October last year Government announced that local creditors had accepted a cut in interest rate and repayment over a longer period.

After a year of back and forth, external creditors announced in a joint statement with Government last Friday that they too had finally reached “an agreement in principle”.

Stating that reaching a deal in less than two years was normal, Persaud insisted that now Government could focus on tackling lingering social issues.

Besides swapping the old debt for new Government bonds, the deal includes a reduction of about 26.3 per cent in the aggregate sum of the original principal amount of the debt obligations and the past due and accrued interest as of October 1, 2019.

He explained that up to May 2018, Government had to fork out close to 30 per cent of its revenues to meet domestic and external debt payments, leaving no room to fix the social issues.

“The old debt was too large and expensive to afford. The total amount of external debt needed to be repaid in foreign currency over the next few years was US$690 million, or three times the level of our foreign exchange reserves in May 2018. At best we would have to repay the borrowing by borrowing more at higher interest rates, and that was digging a deeper hole,” Persaud explained.

“Total savings from this just completed exercise to swap old US dollar bonds of the Government to new ones is $1 billion over the life of the BERT program. Most of it comes from reduced repayments of what is now less debt. The reduction in the amount of external debt outstanding is around 25 per cent or $422 million. We also benefit from a lengthening of the time needed to pay back the debt and reduction in the interest rate on our debt from around 8 per cent to 6.5 cent,” he explained.

The financial expert said the external creditors have already indicated their willingness to remain long-term investors in Barbados.

Persaud also lauded the UK-based White Oak for their role in the negotiation, stating that the country had “benefited greatly from the technical work and negotiations” that they provided.

Congratulating Government for reaching a deal with external creditors, Economist Jeremy Stephen told Barbados TODAY the interest that would have to be paid out if the restructuring package did not exist would have pushed the total pay out past the $1 billion mark.

“This move saves the country a lot of fiscal space . . . So we can see that the Government is going to save long-term. My hope is that they have been saving using smart debt management scheme over the last year or so to ensure that we have some bit of advantage going forward,” said Stephen.

He explained that from a macroeconomic perspective, reaching a deal now allowed Government more certainty to manage its expenses and should result in more social expenditure “in a way that hasn’t been seen for the last year”, and possibly some capital expenditure.

He also anticipated more investment in improving Government processes and training of the public sector employees.

However, the noted economist issued a word of caution, pointing out that “the deal is not sufficient to say we are out of the woods”.

He said while it was a billion dollars that would be realized in savings, one had to also take into account the International Monetary Fund (IMF) assistance repayments that Government had to make.

Stephen said it was therefore critical that Government find ways to attract more foreign investment so as to create a buffer to support paying out the new Government securities when they become due.

“A lot of those new bonds are going to probably trade at a huge discount and therefore dampening demand for Barbados bonds going forward, and that is something you have to take [into consideration]. So it means that we have to find new strategic investment partners on both the private sector side and on the Government side,” said Stephen.

He said the debt restructuring was inevitable, explaining that “either the country blew up because we did not restructure – blew up from a social and financial point of view – or we restructure and we can repair the damage by showing fiscal and social prudence going forward in terms of our management of our financial social resources”.

“So from a macroeconomic point of view, there are a lot of good benefits in the short-term and it remains to be seen how well the Government manages this newly found and ‘certain fiscal space’ that they have been granted,” said Stephen.
marlonmadden@barbadostoday.bb