- June 12, 2019
Oh what a difference a year makes! If you doubt that statement, consider the following information just released in the Barbados Stock Exchange’s (BSE) first quarter report for 2019. Between January and March 2018 the BSE’s Fixed Income Market, which includes Government of Barbados securities, had 61 trades with a face value exceeding $30.73 million. This involved the trading of 20 Barbados Government Debentures and 8 Barbados Government Treasury Notes. But guess what? In the same three months this year there was no trading activity on the Fixed Income Market. Should anyone in Barbados be surprised? Certainly not; it is a sign of the times. Investor confidence has taken a beating as the Government of Barbados tries to fix its debt woes.
The BSE itself acknowledged that the absence of Fixed Income activity was due to the Government of Barbados’ domestic debt restructuring programme announced in September 2018. If ever there was an example of how swiftly the tide of investor confidence can rise and fall, this is it. Small wonder that the Central Bank of Barbados’ recently welcomed American economist Dr. Linda Tesar to discuss the topic “In A World Of Rising Debt, How Can Caribbean Countries Stay Afloat?” Tesar, who is a professor of economics at the University of Michigan, was the Central Bank’s 6th Distinguished Visiting Fellow, and she addressed the debt issue during the annual Caribbean Economic Forum.
Tesar, who admitted to being no expert on Caribbean economies, was giving her views against the backdrop of information from the International Monetary Fund showing that global debt totaled US$184 trillion in 2017, the equivalent of US$86 000 per person. She thinks it is not yet a crisis, even though it is definitely cause for concern. That’s certainly the case for Caribbean islands which are considered some of the world’s most highly indebted. A year ago Barbados had the unflattering reputation of being one of the world’s most indebted nations. Barbados Government’s debt to GDP ratio was about 175 per cent of GDP. Following the restructuring of about $11.9 billion in Barbados-denominated debt, that number has been reduced to a more acceptable 125 per cent of GDP. The plan is to reduce that even further to 60 per cent of GDP by 2033 and by any stretch of the imagination that is a tall order. That is especially so when the administration of Prime Minister Mia Mottley is seeking to achieve a primary fiscal balance of six per cent of GDP in this current financial year, which started on April 1. That certainly will not be a walk in the park. Just ask the ordinary Barbadian who feels it daily in the form of austerity.
Not to mention the fact that the economy remains in recession. It’s the kind of environment where investors are unlikely to touch Barbados Government debt with a 10 foot pole anytime soon. The good news is that the Government in Barbados has made a positive start by substantially reducing domestic debt, and doing so with the blessing of creditors. This is even though many of them, from the large institutional investor to the average pensioner, is still smarting from the fact they have taken a big cut on their interest and will have to wait longer than expected to get what is due to them.
But back to Tesar, she said global debt has reached unprecedented proportions to the point where it would put constraints on what governments can do. And we all know what happened the last time debt skyrocketed – the global financial crisis and great recession followed. External shocks are beyond the control of Barbados and other Caribbean nations but there are steps they can, and must, take to climb their way out from underneath the pile of debt which has sapped investor confidence.
• Governments need not only to pay their debt obligations, but must meet them on time. Arrears are like a tightening noose around the necks of countries, especially those with small economies.
• Fiscal discipline must be exercised, including cutting wastage, reducing corruption, and paying suppliers when their monies are due – not months later.
• Tax collection also needs to be made more efficient so there is no need to impose new levies on an already heavily-taxed society.
• Business facilitation must be improved to make the lives of domestic and foreign investors easier.
To be fair, a number of these steps have been promised, but the key will be in the speed and efficiency of their implementation. Oh, and there remains quite a big elephant in the room - foreign debt. Yes it’s true that 80 per cent of Barbados’ overall debt is domestic but being in deliberate debt default for a year and counting is not a record to treasure. Debt restructuring negotiations often take between 12 and 18 months to conclude, but these are far from normal times.
The faster Barbados can conclude debt restructuring terms with external holders of US-dollar denominated debt the better. Foreign currency credit ratings are at stake, as is the influx of much-needed foreign investment. So is the country’s reputation as one which always honours its debts?
What difference will the next year make? Time will tell, but inaction is not an option.