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#BTEditorial – Awaiting investors’ response after debt restructuring

by Barbados Today
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Government, through the Central Bank of Barbados has taken the bold step of inviting Barbadians to invest $125 million in treasury notes, paying 4.25 per cent interest and maturing in five years.

The action seems to signal a testing of the waters, a gauging of the appetite of Barbadians for Government paper.

In notices published this week, the Central Bank invited subscription to the notes which open on Monday November 22 for issue on December 1.

Treasury notes are normally great short-term investment instruments, and this set which the government is placing on the market, will be paying an attractive interest rate every three months.

With the notes coming in denominations of $1, 000, they are, on the surface, the kind of investments that the average citizen looking to make their savings work for them, should possibly consider.

In addition, institutional investors are champing at the bit for safe, yet productive investment vehicles in an environment where there is very little locally to invest in.

Depositors are effectively operating in a zero-interest rate environment in the commercial banking sector. On the other hand, with consumer demand still relatively low due to pandemic restrictions and fears about job security, deposit-taking institutions are awash with millions of dollars.

Credit unions, which are offering much better rates of interest than commercial banks and fewer fees, have become an increasingly popular place for Barbadians to park their savings.

In normal circumstances, credit unions would have been among the first in line to grab Government paper, given the high level of liquidity in the system and reduced demand for loans.

But we know that the wounds are still fresh from government’s 2019 debt restructuring exercise. Credit unions, the National Insurance Scheme (NIS), commercial banks, some high-net-worth individuals, and recent retirees with large lump sums receipts, were among those who took a hit.

Once regarded as among the safest investment vehicles on the island, Government’s new issue of treasury notes will be a test of faith for many to throw their lot into at this time.

It will also be a test of confidence in the administration to keep its word that the bruising debt restructuring exercise was an anomaly and would not become a practice of the state.

The problem which the current offer presents is that some will argue that Government is really the only major party in town in this small market.

In fact, there was a time when, when the NIS, for example, was accused of investing too much in Government instruments. The NIS’ defence was, ‘what else is there that is secure enough in which to invest citizens’ future pensions and benefits?’

The social security scheme said it was already hamstrung by legislation that limits its overseas investments and there were private investments such as the luxury Apes Hill project in St James which the NIS had lost money on.

Apathy following the debt restructuring exercise presents the greatest challenge to the government on this occasion.

Governor of the Central Bank of Barbados Cleviston Haynes was reported in the media, noting that coming issuance “represents the first step towards restoring normality to the domestic capital market while creating greater balance between new domestic and external funding”.

But government has borrowed billions of dollars over a short period of time to respond to the COVID-19 pandemic, pushing the island’s debt to GDP ratio into the realm from which it was trying to extricate the country when the administration took office in 2018.

But Governor Haynes argues that as “the economy recovers, Government will revert to its programme of fiscal consolidation through primary surpluses, enabling the temporary increase in the debt ratio to taper off as Government continues to honour its debt obligations”.

More importantly, the Governor stressed, “There has been a material change in the environment for investing and therefore [Barbadians] would be willing to buy into securities that are being issued by the Government”.

The point is that at 4.5 per cent and with interest payments every three months, these T-notes are an extremely enticing offer.

Commercial banks represented a sector that was heavily invested in Government securities, and having been burned once, in an extended battle with Government, it will be quite interesting to examine their response to this offer.

In any event, we can regard investors’ response to the new treasury issue as a possible vote of confidence or a thumbs down, and an important barometer of how the state might want to approach further debt instruments.

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