Government will need to refinance about $1 billion in debt this fiscal year but the authorities say this is a low risk to the overall debt portolio.
Other risks being assessed include increased interest rates and foreign exchange rates, says the Fiscal Risk Statement 2025 prepared by the Fiscal Risk Unit of the Ministry of Finance, Economic Affairs and Investment.
On debt refinancing, the report said: “The portfolio’s average time to maturity is 9.5 years, with domestic debt averaging 11.1 years and external debt 6.9 years.
“Approximately 6.5 per cent of the total debt stock ($962 million) will need refinancing in the next 12 months. This includes 4.3 per cent of external debt ($243 million) and 7.8 per cent of domestic debt ($719 million).”
Risk Unit experts say Barbados’ debt stock currently “has a low refinancing risk”.
“Most domestic debt is held in stepped rate bonds that amortise over an extended period, while the external debt portfolio mainly consists of multilateral loans and a sovereign bond that amortises over five years,” they added.
The unit noted that “refinancing (roll-over) risk captures the exposure of the debt portfolio to unusually higher interest rates at the point at which debt is being refinanced; in the extreme, when this risk is too high it may not be possible to roll over maturing obligations”.
The report said that despite refinancing risk being deemed low, “the debt stock remains a vulnerability”.
“Debt service costs have risen due to higher interest rates on external multilateral debt and scheduled payments on restructured debt obligations,” it added.
Debt portfolio risk is one of the areas examined in the report which states that “Barbados is committed to manage its debt portfolio effectively, mitigating risks and ensuring fiscal stability”.
“Every debt portfolio inherently carries risks and associated costs. Effective portfolio management involves identifying these risks and developing strategies to mitigate them, considering any constraints to avoid undue costs and minimise potential losses,” the statement noted.
Vulnerability
In addition to the refinancing issue, the other key areas of risk in relation to the debt stock are interest rates and foreign exchange rates.
Interest rate risk refers to the vulnerability of the debt portfolio, and
the cost of Government debt, to higher market interest rates at the point at which the interest rate on variable rate debt and fixed rate debt that is maturing is being re-priced.
Foreign exchange risk relates to the vulnerability of the debt portfolio, and the government’s debt cost, to a depreciation/devaluation in the external value of the domestic currency.
The report explained that “the weighted average cost of the overall debt portfolio is around 5.1 per cent, up from 4.8 per cent at the end of fiscal year 2023, largely due to increases in the secured overnight financing rate and the US Fed’s interest rate hikes”.
Government’s measures to mitigate this challenge include debt swaps – exchanging expensive debt with cheaper debt. Barbados has already completed debt-for-nature and debt-for-climate swaps.
“The increased multilateral debt in the portfolio carries variable interest rates, resulting in 69.7 per cent of external debt being subject to interest rate changes within a year as of March 2024, up from 66.3 per cent in March 2023,” the report explained.
“The [secured overnight financing rate] is the reference rate for most variable rate external loans. Although interest rates have continued to rise, the pace has slowed.
“Overall, about 74 per cent of the debt portfolio has a fixed rate structure, mainly due to domestic stepped-up amortising bonds, fixed rate treasury bills, and fixed rate sovereign bonds and external loans.”
The report said that foreign exchange risk remains manageable, with most external debt denominated in US dollars that acts as a natural hedge since international reserves and export receipts are also in US dollars”.
“Barbados’ fiscal and debt dynamics can be negatively impacted by adverse variations in baseline macroeconomic and market variables, such as weak economic activity, fiscal slippage, and natural disasters.
“Barbados is proactively adopting strategies to build climate resilience into its debt portfolio. This includes extending instruments to be covered by natural disaster and pandemic clauses,” the report said. (SC)
