Those of us working in the finance and the financial sector in general understand that it is sometimes necessary to restructure and refinance debt to create the capacity to turn our business around.
Governments like the United Arab Emirates (UAE) with surplus cash are the best candidates to lend funds to a country like Barbados with our current constraints.
There are a couple of areas where I differ on Dr David Estwick’s proposal.
I would rather see a structured sinking fund consisting of a mixture of sovereign, corporate and super national debt instruments rated A or better than a fixed deposit.
It would allow the investment manager the ability to generate returns higher than the interest rate on the debt.
I would argue that there could be limited investment in equity securities included the sinking fund, but this may create a risk portfolio that would not be compatible with the desired end result. I would rather borrow up to the original US$5 billion suggested than the $3 billion amount stated.
I would not reverse the retrenchments that have already occurred. However, as the restructuring process continues, I would seek to better match skills with needs first from the pool of retrenched staff.
There are risks in the proposed transaction. If we don’t earn the yield we are looking for on the sinking fund, then it would not be a cash neutral or cash positive solution. The biggest negative is the doubling of the current national debt which is offset by increasing our holding of foreign reserves by $10 billion, less the immediate repayment of the Credit Suisse facility.
The sinking fund itself would be the security for the loan since it would not be used to pay down 100 per cent of the existing debt. The other side I am seeing is a gradual increase in our credit rating over the next 18 to 24 months back to investment grade.
This would reduce the current yield demanded on the outstanding Barbados debt and revalue its current market value upward. The danger of repaying the debt in full is that no lesson is learned. There would be a current account surplus created almost immediately which I guarantee would be wasted in the short term.
Some of the near-term debt coming to maturity owed to the NIS would be paid to them in US currency, which would allow them more capacity for international investments, creating a larger pool of total foreign holdings over the long term.
It removes the devaluation fear and creates an overall positive climate for foreign direct investment. The biggest challenge is to ensure that there are mechanisms which reduce the risks of inflation. The period after the existing debt is repaid in the next ten to 12 years needs to be carefully considered.
However, with the sinking fund in place it is conceivable that it could be used to retire a significant portion of the UAE debt immediately after the existing foreign debt is retired.
This proposal warrants close examination. It could substantially reverse the trajectory we are on and place us on a path of growth as well as long term stability of our currency peg.
Colin Daniel is the principal of Strategic Consulting & Advisory Services.