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Caribbean debt and deficits Moody’s: Aggressive fiscal measures needed

Moodys-Building

International ratings agency Moody’s Investors Service says three bond restructurings totaling about $9.7 billion in the Caribbean this year didn’t go far enough to fixing the region’s “unsustainable” mix of debt and deficits.

The agency said the measures failed to ignite economic growth and may not help the region avoid more defaults. 

This year, Jamaica and Belize, restructured about $9.5 billion in local and global bonds but Moody’s in a recently published report, said there a “high probability” that they will default again.

In the region, only the Bahamas is expected to grow more than 1.5 per cent this year compared with four per cent for Latin America and economists have warned that without faster growth, repeat defaults may become common as Caribbean governments find it easier to cut bond payments rather than spending.

The average debt for countries in the region compared with the size of its economy stands at 70 per cent, with Jamaica, Antigua & Barbuda and Grenada above the 93 per cent ratio that forced Cyprus to seek a bailout in March. Jamaica’s debt-to-GDP ratio reached 140 per cent last year.

Edward Al-Hussainy, a Moody’s analyst for the Caribbean, wrote in the report: “A sustained reduction in debt in the region over the next decade will require a combination of aggressive fiscal consolidation and increased economic growth. However, both goals are increasingly out of reach.”

Higher interest rates tied to previous restructuring agreements contributed to a 12.7 per cent jump in regional debt from 2008 to 2011, reversing a 15 per cent decline over the previous three years, the IMF said in a November report. Antigua & Barbuda and St Kitts & Nevis restructured debt in 2010 and 2012, respectively, making the past three years the highest on record for Caribbean defaults.

“It’s a self-reinforcing cycle,” Al-Hussainy said. “Other governments may be looking around and instead of waiting for a crunch, decide to take their chances now.” Even after its restructuring, Belize’s bonds yield 9.7 per cent, the most among 58 emerging market economies tracked by JPMorgan’s EMBIG index after Argentina and Venezuela. Jamaica’s debt yields 8.3 per cent. The yield on Cayman Islands bonds was 5.6 per cent, compared with about 3.5 per cent for similarly-rated China and Chile.

Belize is forecast to grow 2.5 per cent annually through 2015. This year, the country agreed to pay 56.75 cents on the dollar for $544 million of defaulted bonds after initially offering 20 cents following a missed coupon payment in August. The country’s debt load will fall to 71 per cent of GDP this year from 77 pe rcent in 2011. Belize’s government will “fine tune” its debt management and “upgrade debt monitoring,” Prime Minister Dean Barrow said in a March 1 speech.

Yields on Jamaica’s dollar bonds due in 2019 fell to 7.8 per cent yesterday after reaching nine per cent in February when the government undertook a $9 billion local debt restructuring. Jamaica’s GDP has contracted four quarters in a row, falling 0.9 per cent in the final three months of 2012. International reserves tumbled to $866 million last month, prompting the central bank to say it would start selling a one-year, dollar-linked bond to shore up investor confidence and introduce two new certificates of deposit.

The Jamaican dollar has tumbled 6.2 per cent this year through May 24, the most among Latin American and Caribbean currencies after the Argentine peso. To prevent another restructuring, Jamaica’s government established an oversight committee and set up an office in the Ministry of Finance dedicated to implementing economic reforms, Finance Minister Peter Phillips said. The IMF said that the country is making progress in improving its economic prospects, aided by a $932 million loan from the Washington-based lender.

 
Grenada said on March 15 it would swap $193 million of global bonds as debt-to-GDP burden reached 105 per cent. The island previously defaulted in 2004. 

Holders of Grenada’s dollar bonds should expect a “significant” reduction in the value of their holdings as the island seeks its second restructuring since Hurricane Ivan in 2004. According to the terms of Grenada’s 2004 restructuring, the coupon on its dollar bonds was set to climb to 4.5 per cent in September from 2.5 per cent last year, eventually reaching nine per cent in 2018.

Economic pressures are also weighing on countries that don’t have a track record of defaults. Yields on Barbados’s bonds held near a five-year low of 5.96 per cent last week. At the same time, tourist visits declined 12 per cent in April from a year earlier, the 13th straight month of declines, according to the country’s central bank. 

The island lost its investment grade rating with Moody’s in December when it was lowered to Ba1, putting the country in the same category as Morocco, the Philippines and Guatemala. For the government, the cost to service debt is “very low” at 7 per cent of GDP, Barbados Central Bank Governor DeLisle Worrell said. “As far as the foreign investor is concerned, there’s absolutely no reason why they should have any apprehension about Barbados ability to repay debt.”

With much of the region struggling under elevated debt burdens, the Caribbean Development Bank praised the Cayman Islands and other Caribbean nations under administration by the UK, which has put limits on borrowing and helped force balanced budgets. The yield on 2019 dollar bonds sold by the Cayman Islands fell to a record low 2.75 per cent on May 16.