Worse-Than-Cyprus Debt Load Means Caribbean Defaults to Moody’sEric Sabo
Three bond restructurings totaling about $9.7 billion in the Caribbean this year are failing to ignite economic growth and may not help the region avoid more defaults, according to Moody’s Investors Service.
The bond swaps this year didn’t go far enough to fixing the Caribbean’s “unsustainable” mix of debt and deficits, Warren Smith, the president of the Caribbean Development Bank, said May 22. Jamaica and Belize, which restructured about $9.5 billion in local and global bonds this year for the second time since 2006, face a “high probability” that they will default again, Moody’s said in a May 20 report.
Among Caribbean island economies, only the Bahamas is expected to grow more than 1.5 percent this year compared with 4 percent for Latin America, Moody’s said in an earlier report. Without faster growth, repeat defaults may become common as Caribbean governments find it easier to cut bond payments than spending, said Arturo Porzecanski, a professor of international finance at American University in Washington.
“These countries are exhibiting an increased unwillingness to pay,” Porzecanski said. “We may be seeing the birth of a region of serial defaulters.”
The average debt for a Caribbean nation compared with the size of its economy stands at 70 percent, with Jamaica, Antigua & Barbuda and Grenada above the 93 percent ratio that forced Cyprus to seek a European Union-brokered March bailout, according to the International Monetary Fund and Moody’s. Jamaica’s debt-to-GDP ratio reached 140 percent last year.
‘Out of Reach’
“A sustained reduction in debt in the region over the next decade will require a combination of aggressive fiscal consolidation and increased economic growth,” Edward Al-Hussainy, a Moody’s analyst for the Caribbean, wrote in a May 20 report. “However, both goals are increasingly out of reach.”
Higher interest rates tied to previous restructuring agreements contributed to a 12.7 percent jump in Caribbean debt from 2008 to 2011, reversing a 15 percent 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 in a phone interview from New York. “Other governments may be looking around and instead of waiting for a crunch, decide to take their chances now.”
Central American and Caribbean bonds have returned 1.8 percent this year, compared with declines of 1.3 percent for emerging market bonds and 2.1 percent for Latin American debt, according to JPMorgan Chase & Co. indexes.
Investors are taking advantage of higher yields for Caribbean debt now and betting they can sell ahead of any payment problems, said Carl Ross, managing director at brokerage Oppenheimer & Co. in Atlanta. The results are also skewed, he said, by a 53 percent return on Belize’s debt this year, which covers a period in which the country emerged from default after skipping a $23 million coupon payment last year.
Even after its restructuring, Belize’s bonds yield 9.7 percent, the most among 58 emerging market economies tracked by JPMorgan’s EMBIG index after Argentina and Venezuela. Jamaica’s debt yields 8.3 percent. The yield on Cayman Islands bonds was 5.6 percent, compared with about 3.5 percent for similarly-rated China and Chile.
The bond rally in Caribbean debt is “more of a fluke,” Ross said. “It’s not reflected in the fundamentals by any stretch.”
Belize, on the Caribbean coast in Central America, is forecast to grow 2.5 percent annually through 2015, Standard & Poor’s said March 20. Belize this year 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 percent of GDP this year from 77 percent in 2011, S&P said.
“We think the debt restructuring only delayed Belize’s problems, and recent efforts to solve fiscal issues have been uninspiring,” Flora Hsu, an emerging markets analyst at Nomura Securities International Inc., said in a May 22 report.
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 percent yesterday after reaching 9 percent 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 percent 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 percent this year through May 24, the most among Latin American and Caribbean currencies tracked by Bloomberg after the Argentine peso.
Jamaica’s local debt swap “buys a bit of breathing space, but I don’t think it addresses the fundamental issues in that Jamaica is verging on insolvency,” said Stuart Culverhouse, chief economist at Exotix Ltd. in London.
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 in a March 16 interview. The IMF said May 21 that the country is making progress in improving its economic prospects, aided by a $932 million loan from the Washington-based lender.
Following the restructurings by Belize and Jamaica, Grenada said on March 15 it would swap $193 million of global bonds as debt-to-GDP burden reached 105 percent. 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, said Culverhouse. According to the terms of Grenada’s 2004 restructuring, the coupon on its dollar bonds was set to climb to 4.5 percent in September from 2.5 percent last year, eventually reaching 9 percent in 2018.
“Grenada has simply run out of money,” Culverhouse said on a March 21 conference call.
“The debt restructuring is only one element of a broad economic strategy to put Grenada’s fiscal house in order, grow the economy and provide jobs,” Carlyle Glean, the island’s then-governor-general, said in a March 27 speech to parliament. “Ultimately, it will help Grenada to meet its obligations to its creditors in a timely and sustainable manner.”
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 percent last week. At the same time, tourist visits declined 12 percent in April from a year earlier, the 13th straight month of declines, according to the country’s central bank. The island nation lost its investment grade rating with Moody’s in December when it was lowered to Ba1, putting the country of 256,000 people in the same category as Morocco, the Philippines and Guatemala.
“The country’s growth prospects remain very limited,” Moody’s said. That is “a ratio generally reached only by much wealthier countries with considerably larger economies.”
Ability to Pay
For the government, the cost to service debt is “very low” at 7 percent of GDP, central bank Governor DeLisle Worrell said at an April 10 news conference. “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 U.K., 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 percent on May 16.
“Markets have been very clear you need to have the right debt-to-GDP ratios,” Rolston Anglin, the deputy premier for the Caymans, said in an interview in Rio de Janeiro. “One of the things we’ve done is made a commitment to not incurring central government debt for the next four fiscal years, and will try to live within our means.”