Barbados Braced For Tough Measures To Clear Debt Burden

BARBADOS BRACED FOR TOUGH MEASURES TO CLEAR DEBT BURDEN

BY FT CORRESPONDENT

PM Mia Mottley says she had no choice but to put in place financial restructuring

Mia Mottley, prime minister of Barbados, has called in the IMF to ‘stabilise the country and stop the bleeding’

Barbados must prepare for a long and painful journey back to financial and economic health, after announcing a radical plan to tackle the fourth-biggest debt burden in the world, according to the country’s new premier.

The Caribbean island is still reeling from prime minister Mia Mottley’s revelation on Friday that it had discovered previously undisclosed financial liabilities, which lifted the country’s overall debt from 137 per cent of gross domestic product to more than 175 per cent. This is the fourth highest debt-to-GDP ratio in the world after Japan, Greece and Sudan.

Given the precarious fiscal situation — the central bank’s reserves are down to just $220m, or seven weeks worth of imports — looming debt payments due this month and the upcoming hurricane season, Ms Mottley said she had no choice but to act quickly by calling in the International Monetary Fund and putting in place a debt restructuring.

“We needed to stabilise the country and stop the bleeding,” the new prime minister said in her first interview with international media. Ms Mottley, a former lawyer, became the country’s first female premier last month, when her Barbados Labour Party won a thumping victory to claim all 30 seats in the lower house of parliament.

Barbados is the latest Caribbean statelet to stumble into financial distress. Since 2010 St Kitts and Nevis, Antigua and Barbuda, Belize, Grenada and Jamaica — twice — have had to default on and restructure their debts, in what Moody’s in 2016 called a “silent debt crisis” for the region.

Its slide into sovereign insolvency has been a long time coming. Barbados was long one of the better-run countries in the region, helping its GDP per capita grow to about $17,000 in 2016. But fiscal discipline started eroding after the global financial crisis, when the economy was hit hard by the resulting tourism drought.

Source: IMF and national sources

The country’s annual economic output is about $5bn, which means its overall bonds, loans and other financial liabilities currently stand at nearly $9bn. Over two-thirds is domestic debt owed to local investors and banks, which raises concerns that a tough restructuring could imperil the solvency of the domestic financial system.

But the prime minister is promising to exercise “a careful touch” to avoid bankrupting its local banking sector in the process.

“We are going to look at each creditor carefully, and make sure that the integrity of the local banking sector will not be impaired,” Ms Mottley said. “They will be hurt, but they will not be made bankrupt. We don’t want to bankrupt anyone.”

However, that means that much of the debt relief Barbados is seeking will have to come out of international creditors, which would also lessen the drain of dollars from the central bank’s coffers.

Barbados has issued three international bonds worth over $600m — all of which had coupon payments due this month — and their prices plunged from about 90 cents on the dollar to under 50 cents on the dollar by Tuesday, as investors digested the news of an immediate payment moratorium. That equals an annualised yield of over 33 per cent for the bond due in 2021.

Ms Mottley estimated that the government now spends more on interest payments than it does on all government salaries, and warned that “the burden of adjustment has to be fairly shared”.

The biggest fiscal drain in Barbados has been transfers to state-owned enterprises that provide services such as utilities, health, education and waste disposal. The IMF warned in its latest report that a “comprehensive restructuring” of these bloated bodies was “critical” to restore the government’s financial health.

Government payments to SOEs, subsidies and retirement benefits have been increasing despite a government austerity programme, and last year reached nearly $600m in a country with just 280,000 citizens, according to the IMF’s latest numbers.

Ms Mottley said her government wanted to “protect the most vulnerable people and areas that are critical to growth”. This means raising minimum pensions and dealing with the disposal of waste on a scenic island where garbage has become a problem. But the prime minister promised this would not imperil the overall belt-tightening that had to take place.

“We are not being profligate, but if you want people to embark on a long march then you have to make sure they don’t do it on an empty belly,” she said.