Economist weighs in on government’s debt

The $125 million in government security recently introduced by the Central Bank of Barbados is being described by one economist as “junk bonds”.

Kemar Stuart, Director of Business Development, Finance and Investment at Stuart and Perkins Caribbean, said the Government was facing a cash shortage, having revised its targeted six per cent primary surplus to -1 per cent primary deficit, which indicates a massive drop in revenue.

He said the Government’s lack of liquidity was further highlighted by the recent introduction of the Debt Settlement (Arrears) Bill, which makes provision for the state to settle more than $300 million in compensation payable for land it had acquired.

“It is important to note that after the debt restructuring, the majority of local debt repayments to creditors, both direct in government paper and via state-owned enterprises, for example, ResLife and CLICO payments, were done using bonds. This became a norm to reduce arrears to these listed creditors,” said Stuart.

“Government’s thirst for cash at this time is extremely high. Hence the reason Government, through the Central Bank, is attempting to market a $125 million bond offering of junk bonds to stave off a cash shortage in Government revenue,” he said.

At the end of November, the Central Bank issued $125 million Treasury Notes, aimed at raising funds to assist with the financing of the economic recovery from the COVID-19 pandemic.

Pointing to the recent B- local currency rating by international credit rating firm Standard and Poor’s (S&P), Stuart said this rating, which is an upgrade from the (SD) Selective Default rating a year prior, was still considered to be below investment grade.

He also pointed to the Caribbean Information and Credit Rating Services Limited (CariCRIS) reaffirming CariBB rating for local currency and CariBB- for foreign currency earlier this year, saying the ratings were indicative of the Government’s fiscal position, its high debt and low growth.

“Moody’s Investor Services said in July 2021 that its assessment of Barbados’ susceptibility to event risk is set at ‘B’, driven by elevated government liquidity risk. At this point, the payment of debt settlement in bonds and the $125 million bond offering from the Central Bank of Barbados indicate that the Government is indeed short of liquidity,” added Stuart.

He argued that there was a “high risk” in investing in government paper at this time given the “high chance of another debt restructuring or re-profiling, coupled with the fact that the government is facing a cash shortage currently”.

Stuart added that the likelihood of local creditors being repaid by the Government on time was “extremely low, as precedence via parliamentary rules that have been set”.

“The debt restructuring bill gave the government the power to default on local debt and to institute a collective action clause which states that only 75 per cent of creditors need to agree to any changes for new potential debt restructurings,” he recalled, while pointing out that the central bank and the national insurance scheme were still awaiting cash replenishment since the debt restructuring.

Stuart said as the Government seeks to pass the Debt Settlement (Arrears) Bill, it should be noted that under the Barbados Economic Recovery and Transformation (BERT) scheme Government was to clear its arrears to creditors based on a primary surplus of six per cent.

“To tackle the pandemic, the government agreed to relax the six per cent primary surplus to -1 per cent primary deficit, which indicates a massive drop in revenue available to pay out to creditors,” said Stuart.

“Barbados’ current credit rating still renders its bonds as junk bonds. Therefore Government-led private sector investment in projects to drive growth is measly since local investment is unattractive… a primary surplus is needed to finance major projects to drive growth,” he said. (MM)