Economist says uncertainly forcing banks to stockpile cash
One prominent local economist is warning that Government’s debt problem could cause further drain on the dwindling foreign reserves if not addressed urgently and could result in further uncertainty, in the business community.
President of the Barbados Economic Society (BES) Jeremy Stephen said the high debt was already contributing to a growing level of uncertainty and a number of factors could make the situation worse.
The most recent Central Bank report had revealed that the country’s debt to private individuals, companies and public entities stood at $4.9 billion, or 53 per cent of gross domestic product (GDP) as at the end of December last year.
The gross Government debt, including borrowing from the Central Bank was 108 per cent of GDP, the proportion of foreign currency debt was 31 per cent of GDP, and the cost of servicing that debt was $391 million, or eight per cent of earnings from goods and services, former Governor of the Central Bank Dr DeLisle Worrell had revealed.
And while Government announced in the recent Estimates that it was expecting to rake in about $2.9 billion in revenue for the 2017/2018 fiscal year, it had also noted that expenditure for the period was expected to rise to $4.5 billion, up from $4.3 billion last fiscal year.
Addressing a recent First Citizens Investment Services market outlook seminar at the Hilton Barbados Resort Stephen pointed out that the debt problem was compounded by a number of factors, including about $900 million of debentures that Government had to service this fiscal year.
In addition, Stephen said the maturity due dates of Government papers, particularly for the 2021 and 2022 period when approximately $400 million would become due to be paid, could impact negatively on the foreign reserves.
“More imminently is that we are at the tail end of the Credit Suisse loan. That is US$275 million in principal alone,” Stephen said.
Pointing out that the island had about six downgrades since that loan, and would likely suffer another two within the next year, Stephen suggested that the interest on the loan could increase.
Additionally, the BES head said even if the Barbados National Terminal Company Limited deal of US$100 million were to be approved, it would simply not be enough to help the reserves, considering “the huge payouts that have to go towards the Credit Suisse loan” alone.
“The next thing that will exacerbate the drains on the foreign reserves generally is the fact that commercial banks have been hoarding since 2013, and I don’t blame them in these condition where Government don’t show the political fiscal will to adjust as quickly as possible despite advice from reputable sources,” he said.
The latest financial stability report showed that the net foreign assets (NFA) in the deposit-taking non-bank financial sector stood at $1.6 billion as at August 2016, an increase of $15 million since September 2015. That increase reflected increased short-term investment balances at banks and institutions.
This compared with the meager $681 million in foreign exchange for the country at the end of December 2016.
“There is no Caribbean country, irrespective to exchange rate regime, that has a case where the total amount of NFA that banks have are more than the international foreign reserves. No country,” said Stephen.
“The fact that since 2013 the NFA has been more than the Central Bank’s reserves are a major concern, meaning that the banks are very sensitive to any risks going on in the society,” he said.
“So you have a case now where there is a lot of pressure on the ability to protect the peg and . . . for Government to maintain a sustainable debt profile, which spells a lot of uncertainty for business persons,” Stephen added.