There is an upside to Government defaulting on its debt, says President of the Barbados Economic Society (BES) Shane Lowe.
Lowe told Barbados TODAY that it could give the country needed “breathing room” to implement a much needed adjustment programme.
However, he acknowledged that with the decision, Barbados was also exposed to tremendous risk.
“The main benefit of a country defaulting on its debt is that it gives the country enough breathing room to implement a structural adjustment programme, normally under the auspices of the International Monetary Fund (IMF),” Lowe said.
“This structural adjustment programme attempts to address the underlying cause of the problem driving the demand for debt as well as the balance of payments disequilibrium,” he explained.
As part of a major plan to tackle the island’s massive debt of over 170 per cent of gross domestic product (GDP) and low international reserves of only US$220 million or seven weeks’ worth of import cover, newly elected Prime Minister Mia Mottley on Friday announced that her Government would be seeking balance of payments support from the IMF.
Since then, a team from the Washington-based financial institution, led by Dr Bert van Selm, has arrived here for talks with key officials of the Mottley Government, as well as private sector and trade union officials.
In the meantime, Government has decided to default on its foreign debt payments, a move that is expected to be followed by an adjustment by ratings agencies of Barbados’ credit rating to “selective default”.
Already, the value of the island’s international bonds, which carry a maturity date of 2019, 2021 and 2035, have plunged to about half their value, as investors seek to get rid of them.
However, pointing out that several Caribbean countries, including Jamaica, St Kitts and Nevis, Grenada and Antigua and Barbuda, had chosen to restructure their debt in recent times, Lowe said the main benefit was a reduction in interest payments that allowed them to cut recurring expenses, improve their fiscal position, realize faster economic growth and lower their overall levels of debt.
However, he warned that the key problem with a reprofiling exercise was the enhancement of financial sector vulnerabilities as institutions who own Government’s debt incur losses.
The BES head also said there was the chance of reputational risk, loss of future access to the international credit market due to further credit rating downgrades and the potential for prolonged legal battles with vulture funds.
“However, in the absence of access to international credit markets, a financing programme with the IMF provides a cheaper source of foreign financing to stabilize the foreign exchange reserves in the medium term,” he said.
“The ability to regain access to international borrowing and reverse any deterioration in reputational risk will require a sustainable reduction in the Government’s debt. Ultimately, it will lead to the restoration of Barbados’ international credit rating to a more credit-worthy status,” he added.
At the end of fiscal year 2017/18, the Government’s external debt obligations were approximately BD$2.7 billion or approximately 29.6 per cent of GDP while domestic debt, including that held by the National Insurance Scheme, was approximately 120.9 per cent of GDP.
And while the country’s external debt has been declining since 2015 when compared to its domestic debt, it has become increasingly difficult to rollover foreign debt due to the island’s falling external credit ratings, which are now in junk status.
While noting that external debt was an important source of financing that allowed small states to minimize the negative impact of new projects on their foreign exchange earnings, Lowe said Barbados’ debt problems were due in large measure to a slowdown in private capital inflows.
“This reduction in capital inflows leads to a fall in foreign exchange reserves and makes it difficult to continue to pay for imports of goods and services as well as to make payments on external debt,” he said, while noting that the island’s foreign direct investment fell from US$316 million in 2014 to US$156 million in 2017.
“This decline in FDI inflows, along with other factors, resulted in the international reserves falling from US$527 million to US$205 million between 2014 and 2017,” he explained.
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