This is a response to the article in the Sunday Sun Nation Newspaper entitled “Bonds A Risk: Investment firm says Barbados will find it difficult to pay”.
In the front page of the Nation’s Sunday Sun, Victoria Mutual Wealth Management VMWM (a Jamaican investment firm) claims, without presenting a single piece of evidence or analysis, that Barbados’s Bonds are high risk and that the Government will find it difficult to repay those bonds. Unfortunately, I have to write this article to provide clarification and to reject the conclusion in the article that, in my opinion, is either based on weak economic and financial analysis or a failure to access the relevant data. I now present the facts:
The first unfounded claim the firm made is that the recent 6.5 percent 2029 bond is high-risk. Nothing can be further from the truth. This bond is currently trading at 98.38 cents on the dollar (August 30, 2020), just slight below par, which is amazing in a COVID-19 crisis environment and for debt that has been recently restructured. The trading price (which may be accessed by all on Bloomberg) is a strong indication that investors are confident in the policies being pursued by the Barbados Government and consequently our ability to repay our debt. A picture speaks 1000 words. Let us look at the Charts.
Chart 1 shows that the price of this Barbados 2029 bond has risen consistently since early May 2020 in spite of the pandemic and the known implications of the major reduction in global travel. The upward trend of the trading price also reflects investors’ preference for holding the Barbados bond relative to other bonds available on the market. The fact is that this trend in bond prices does not support the conclusion that our bond is high-risk. Let us be clear – high risk bonds sell at a low price, which keeps falling until someone buys them. This is in fact the opposite here; Barbados bonds are low risk. How do we know? Nobody wants to sell them off and hence, any investor must be willing to pay a high price to get them.
Let me give further support of the confidence that the market has in the Government of Barbados bonds. Chart 2 shows that the spread between the Barbados 2029 Bond and the US 10 year Bond has been declining consistently since early May 2020. The means that, day after day, investors are opting for the Barbados bond relative to the US Bond. This only happens if investors believe that the Barbados bond has a lower risk than the US bond. This is basic financial analysis – the Bond yield on Barbados’ external debt does not in any way indicate that the instrument is under stress.
The second unfounded claim made by the firm is that there are concerns about Barbados’ ability to manage its debt between now and 2029 when those bonds mature. The fact is that our international reserves are at historically high levels—more than US$1 billion or more than 30 weeks of import cover. This means Barbados’ capacity to make external debt payments is strong. We are projecting (as has the IMF) that when 2029 comes around, Barbados will have roughly 6 times as much international reserves as is required to service our debt, and this is inclusive of all debt due (see Chart 3). So, there are absolutely NO concerns over the country’s ability to service its debt in future years from its stock of international reserves.
Those are the only two points which Victoria Mutual Wealth Management has made to arrive at their erroneous conclusion. We welcome the opportunity to meet with them as we are prepared to show in greater detail why the two assertions are unfounded and incorrect. I will also point out that the highly successful domestic and external debt restructuring completed respectively in November 2018 and December 2019 was designed to ensure that we never return to that position again where the country is unable to service its debt.
Maturities of our debt instruments were lengthened so that there is sufficient time for the country to recover from the preceding 10-year recession before it has to repay these bonds. Interest rates of these new debt instruments were also reduced. Instead of paying 68 cents out of every tax dollar in debt service the Government of Barbados is now paying 22 cents. This is not only more affordable but means that we could invest the monies saved from the restructuring to grow the economy (as we were doing) and to be even in a better position to repay our debt or now more importantly, as has happened, to meet the tremendous challenges of the pandemic and the closure of our borders.
Both the IMF and the Rating Agencies have stated in their various publications that our debt restructuring and our commitment to primary fiscal surpluses pre-Covid have combined to put public debt on a sound footing, and on a downward trajectory over the medium and long term. This is still their conclusion, even after we take into account the current challenges presented by the global COVID pandemic.
Dr. Kevin Greenidge