Sharper eyes on borrowing

We had previously argued as far back as January last year that “… instead, borrowing on the international market is recommended. Although the country has been downgraded by Moody’s, it still has a good credit rating that it can use to access the external markets. The rationale here is, if, as we suspect prices remain depressed for much longer and we do not sufficiently reduce the deficit, then external financing may be required. We may be very vulnerable to a further downgrade.

It is far easier and less costly to approach international markets now.” It is good to see the government adopting an approach which took advantage of the relatively cheap credit available to access the international market. Once again, the government is going out to finance recurrent expenditure.

While repeating the obvious statement that to borrow for recurrent expenditure is never the best decision, clearly the thinking by the government is that very soon the Juniper fields will come on line and the government will reap the benefits from this. In addition, the write-off of 100 percent of capital expenditure on exploration in the first year will come to an end shortly and of course there is the hope that prices on gas and oil will stabilise higher than expected which will result in higher government recurrent revenues. This will allow the government to service the additional debt it took on.

Admittedly the government has engaged in some fiscal consolidation. It appears, there is no desire for drastic reduction in expenditures that can stall the economy and result in a significant fall in employment. The question that they have to bear in mind is what if prices do not tend to US$60 a barrel - what will the next steps be? There are pieces of information from the debt issue we need to be mindful of. First, over the first six months of 2016 the Balance of Payments registered a deficit of US$367.3 million. Second, for the same period the external current account posted a deficit of US$588.2 million. Third, net foreign direct investment showed a net inflow of a small amount of US$13.3 million. Fourth, there was a net outflow of portfolio investment of US$382.1 million.

Fifth, the gross official reserves at the end of December 2016 stood at US$9,465.3 million or 10 months import cover. Last, but most relevant is the debt/GDP ratio which stood at 56.6 % as at December 2016.

This does not paint the best external position. In addition, initiatives to stabilize and to grow the economy would take time. This newspaper in an article entitled “Avoiding Debt” on Thursday, September 22 2016 pointed out that “Greenidge et al demonstrated that a 56 per cent of debt to GDP ratio is the threshold for the Caribbean, above which increases to accumulated debt result in a reduction in economic growth” then there is also the issue of opportunity cost for the use of funds. No matter how bad the situation we have to be careful about borrowing beyond 56% debt/GDP.