(Trinidad Express) The pace of Government borrowing has surged exponentially, according to Central Bank reports and interviews with academics and bankers.
By the end of its first year in office, Government would have grown the country’s debt by $10.7 billion, 21.4 times more than the previous administration over the comparable period (2010/2011 versus 2015/2016).
The Central Bank of Trinidad and Tobago’s (CBTT) Monetary Policy Report November 2011 said: “Public debt outstanding stood at $71 billion (at the end of fiscal 2010/2011) compared to $70.5 billion at the end of the previous fiscal year (2009/2010).”
By the end of its first year in office, the incumbent Government would have added $10.7 billion to the country’s debt stock of $107.5 billion (as at April 14, according to the CBTT Economic Bulletin).
With interest, taxpayers would have to repay a $2 billion Republic Bank-arranged bond, a US$1 billion ($6.7 billion) Deutsche Bank/First Citizens Bank-arranged bond, and a US$300 million ($2 billion) loan from the Caracas-based Latin American Development Bank (CAF).
Ironically, T&T paid approximately US$323.4 million to join CAF, according to its April 2012 agreement.
In response to a question in Parliament on June 17, Prime Minister Dr Keith Rowley said the country’s debt-to-gross domestic product (GDP) ratio, including the US$1 borrowing, will surge to 53.2 per cent.
This was before the US$300 million loan from CAF was disclosed at a July 21 post-Cabinet press conference in Port of Spain.
At the end of 2015, total public sector debt (excluding sterilised debt) stood at 41.7 per cent of GDP, with domestic debt at 34.3 per cent of GDP and external debt at 7.4 per cent of GDP, according to the CBTT’s May 2016 Monetary Policy Report.
The borrowings from the bond markets were to help plug the fiscal deficit, which, as at April 8, was said to be $6.7 billion.
On June 10, however, Finance Minister Colm Imbert told Parliament in a written statement that “the projected shortfall in income from all revenue streams in 2016 is close to $10 billion,” a reduction from the April 8 “gap” Imbert had then estimated as $15 billion.
As Government continues to borrow to finance spending beyond its means in its first fiscal year, in July 26 interviews, Republic Bank investment managers John Peter Clarke and Stephen Grell, the arrangers of the $2 billion bond, defended their customer’s borrowings.
Earning at higher rate than borrowing=free money
Asked if borrowing is a sustainable way to finance budget deficits, Grell said: “When one speaks about raising financing and incurring debt, it’s two-fold. Are you incurring debt to increase efficiency, to invest in projects that ensure revenues are increased in the future? Then the other angle is, ‘Can you service the debt?’
No large corporation in the world is debt-free. They always have a portion of their balance sheet as debt because debt is cheaper than equity, and if you borrow at a certain rate and you return at a higher rate then you’ve made free money. So it’s really about how you can service the debt. Government, right now, shows it has the capacity to service the debt, and I think, if that were to change significantly, then in the future, they will need to reconsider how they do debt-raising instruments. That’s the thought process we have. Can they service the debt? And is the government using it for the right needs? And both of those tick the boxes for us.”
Clarke said: “It’s very normal. Governments all around the world use deficit financing, and plug their budget deficits with borrowings, and I think what the government has done this year is very wise, in terms of borrowing in local currency for a large part. (As) there is a large gap, we probably can’t plug it in TT dollars, so they have to go to the international (bond) market to borrow.” Grell added: “The government is faced with a bit of a cash flow issue and like any corporation or any entity, you access liquidity when you have cash flow issues. You utilise the debt market to sort of fill that role when there are cash flow issues.”
On the topic of other Governments doing it, the lenders were asked if T&T is heading in the direction of its highly indebted Caribbean neighbours, some of whom have capitulated to International Monetary Fund (IMF) programmes — Jamaica, Grenada and most recently, fellow commodity exporter, Suriname.
Clarke said: “I think we’re still far away from reaching those debt levels. You can look at quite a few islands in the region that have exceeded 100 per cent debt-to-GDP, and I think we’re still within very safe limits, and I think the Ministry of Finance really manages that closely and carefully to ensure that we maintain our (credit) rating. Even though we’ve been cut (by Moody’s twice and Standard & Poor’s once in less than 12 months), I think T&T will weather this period because of prudent financial management.”
In a July 29 release, Moody’s assigned a Baa3 rating to T&T’s US$1 billion bond maturing in 2026.
No denying debt levels accelerating
Asked if T&T’s debt levels are growing at an accelerated pace, although it is “still far” from its Caribbean neighbours’ debt crises, Grell said: “I think the trend says yes, our debt-to-GDP is increasing. There’s no denying that. That’s pure numbers, but I think prudent management and having a strong plan for 2017 to 2020, to really reduce the budget deficit, allows you to say, well, in five years from now, we’re going to be either at this place, which, in real terms, will be a better position because GDP would have grown, or we would have reduced. That onus is placed on the government, and how they make their plans, and also of course, how the revenue is generated.
If oil were to rebound, you will then see GDP increasing, and Government revenues coming in, filling that hole. These bonds will be repaid, so your debt-to-GDP will be decreasing as well, because you will have the debt decreasing and the GDP increasing, so the band moves quite quickly.”
Clarke and Grell also praised Government for locking in the interest rate it will be paying on the bonds.
Grell said: “So they’ve locked in their interest rate risk. They’ve also done wisely by going out now. In low interest rate environments, a borrower should try to get his duration exposure higher because, in the end, interest rates may rise, and these bonds — the borrowings in these times — would essentially be cheaper.
The University of the West Indies (The UWI) senior economics lecturer Roger Hosein, commenting on GDP ratios, said: “Debt-to-GDP ratios in Guyana, Jamaica, St Kitts and other Caribbean countries are high because of their borrowings. In these countries, their export revenues and their governments’ revenue generated from taxing the productive sector was insufficient to meet the fiscal expenses of the State.
Now, this therefore has two parts. It means that in the Caribbean, we need to work on collecting more fiscal revenues, but in many cases, income taxes are already high, so the real challenge, therefore, is to manage fiscal expenditure and bring it downward. In many cases, transfers and subsidies, and government consumption are too high, and therefore we need to take a closer look at our fiscal expenses in the region to see how we can best manage them.”
Hosein continued: “In the T&T case, the debt-to-GDP ratio is lower than Caribbean countries, but in my mind, it is higher than where it should be, which points to fiscal mismanagement in the years of plenty, as certainly our Heritage and Stabilisation Fund (HSF) should have had three to four times the amount of money it currently has (US$5.53 billion).
Consequently in these lean times, instead of drawing down on a much larger HSF, we need to turn abroad, and this is part of the whole resource-curse dilemma.”
