Bond restructurings fail to ignite Caribbean growth – Moody's

Nelson A. King

NEW YORK, United States, Monday June 3, 2013 – A major international credit rating agency says three bond restructurings in the Caribbean this year, totaling about US$9.7 billion, have still failed to ignite economic growth and may not help the region avoid more defaults.

Moody’s Investors Service said the bond swaps this year did not go far enough to fixing the Caribbean’s “unsustainable” mix of debt and deficits.

It said, among Caribbean island economies, only The Bahamas is expected to grow more than 1.5 per cent this year, compared with four per cent for Latin America.

The Wall Street-based rating agency said the average debt for a Caribbean nation compared with the size of its economy stands at 70 per cent, with Jamaica, Antigua and Barbuda and Grenada above the 93 per cent ratio that forced Cyprus to seek a European Union-brokered March bailout.

Moody’s said Jamaica’s debt-to-Gross Domestic Product (GDP) ratio reached 140 per cent last year.

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

Referring to an International Monetary Fund (IMF) report, Al-Hussainy said higher interest rates tied to previous restructuring agreements contributed to a 12.7 per cent jump in Caribbean debt from 2008 to 2011, reversing a 15 per cent decline over the previous three years.

He noted that Antigua and Barbuda and St. Kitts and Nevis restructured their 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.”

The Wall Street-based JPMorgan Chase & Co. indexes said that Central American and Caribbean bonds have returned 1.8 per cent this year, compared with declines of 1.3 per cent for emerging market bonds and 2.1 per cent for Latin American debt.

Carl Ross, managing director at brokerage Oppenheimer & Co. in Atlanta, Georgia, said investors are taking advantage of higher yields for Caribbean debt now and betting they can sell ahead of any payment problems.

He said the results are also skewed by a 53 per cent return on Belize’s debt this year, which covers a period in which the country emerged from default after skipping a US $23 million coupon payment last year.

But, according to JPMorgan’s EMBIG index, even after its restructuring, Belize’s bonds yield 9.7 per cent, the most among 58 emerging market economies, after Argentina and Venezuela.

The index said Jamaica’s debt yields 8.3 per cent; and the yield on Cayman Islands bonds was 5.6 per cent, compared with about 3.5 per cent for similarly-rated China and Chile.

The bond rally in Caribbean debt is “more of a fluke,” Ross said, addding “it’s not reflected in the fundamentals by any stretch”.

Another Wall Street-based rating agency, Standard & Poor’s (S&P), said Belize is forecast to grow 2.5 per cent annually through 2015.

This year, Belize agreed to pay 56.75 cents on the dollar for US$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 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,” said Flora Hsu, an emerging markets analyst at the New York-based Nomura Securities International Inc. in a report.

In March, Belize Prime Minister Dean Barrow said the government will “fine tune” its debt management and “upgrade debt monitoring”. (CMC) Click here to receive free news bulletins via email from Caribbean360. (View sample)