Article written by Ryan Straughn published in the Business Authority on May 19, 2013.
As I sat to scribe this article, one thing kept running through my mind. “Bring drinks, somebody gine pay!” The Minister of Finance in his own style stated recently that local financial institutions (FIs) were not keen on investing in long term government paper. A startling admission for any public official to make about the state of government finances least of all the Minister actually responsible. By raising the T-bill limit by $1 billion last week to help finance its underestimated deficit of $1.25 billion, the government has again signalled to the market that it has absolutely no intention of reducing expenditure in any meaningful way. No wonder financial institutions have them on the shortest possible leash.
Further, the avoidance of government’s long term paper is another clear signal that our credit quality has diminished significantly amongst local investors which is consistent with credit status/downgrades from both Moody’s and S&P. Those who choose to open their eyes would see this flight from long- to short-term securities as genuine concern by institutional investors that the fiscal imbalances and government insisting there will be no change of course makes a default more likely at some future date.
Last month the Central Bank stated the medium term fiscal strategy (MTFS) was off track and needed to be brought back on track. As an economist, it is my view that the MTFS was never on track since at its core the intention was to run current account deficits in order to solve a current account deficit induced debt problem. Further there was no plan to repay the debt incurred by running said current account deficits.
The government also admitted its reliance on both the Central Bank and NIS purchasing T-Bills. The reader must be reminded that part of the MTFS was for the NIS to finance UWI, Transport Board etc. to the tune of $110 million a year. In addition, the NIS acquired around 70% of the $1.7 billion debentures issued in the last 5 years and also increased its holdings of T-Bills by $180 million in the same period. After all the song and dance about the economy being stable, the government simply increased its own credit card limit by another $1 billion again with no plan on how to repay. This is but another sign the government is panicked. The government assumes that by increasing the borrowing limit on T-Bills FIs will provide more cash without considering how we found ourselves in this position. It’ll be interesting to see the rating actions of Moody’s and S&P and the IMF consultation later this year because clearly our government seems incapable of learning.
Twenty years ago the Mighty Gabby sang a sweet calypso in which he pleaded “Oohhh Loorrdddd, send an answer fuh we!” With businesses closing rapidly, bankers and insurers losing confidence in government paper, it is no longer a matter of whether the economy has reached the tipping point, it’s time to put on your pyjamas and say good night.