reducing high debt in the caribbean
TRANSCRIPT
4-3-2 Comprehensive Framework for Debt Reduction
Shan Gooptu (Sector Manager, Economic Policy and Debt Department, PREM)
Auguste Kouame (Sector Manager, Economic Policy, Latin America and Caribbean Region)
World Bank
September 2011
Reducing High Debt in the Caribbean
9 out of 15 countries had debt levels higher than 60% of GDP in 2009
0 30 60 90 120 150 180 210
SurinameHaiti
Dominican RepublicTrinidad & Tobago
Bahamas, TheGuyana
St. Vincent & Grens.St. Lucia
BelizeDominicaBarbados
Antigua and Barbuda GrenadaJamaica
St. Kitts and Nevis
2009
2000
High debt is not a new phenomenon in the Caribbean
ECCB debt target (60 percent of GDP)
Public Debt to GDP
Source: IMF HPDD
Contributing factors to high debt
In Caribbean 8:Low growthFiscal deficitsHigh interest billsAssumption of non-
government debt-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
Primary Balance
(ex. grants)
Grants Interest Real GDP
Price Effect
Other Total increase
2000-05
2006-08
2009
Average annual contributions to debt to GDP (percentage point)
Caribbean is vulnerable to crises beyond their control
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Antigua and Barbuda -4.8 20.5 4.85 10.4 -1.28 -7.02 -23.5 -5.67 -12.5 -0.48 25.4
Bahamas, The -1.42 -0.9 0.33 2.05 1.73 1.87 -0.48 -0.05 1.03 2.93 4.3
Barbados 8.47 9.1 -3.16 1.44 -11.4 3.57 7.27 9.13 10.2
Belize -3.46 23.5 9.46 5.04 13.7 -0.34 -0.08 -9.87 -7.6 -8.02 3.28
Dominica 5.86 8.73 39.1 5.29 -1.61 -17.8 -7.1 -4.13 -5.22 -9.37 0.62
Dominican Republic -0.26 -3.94 2.27 2.25 14.2 -1.11 -4.78 8.2 -2.98 -12.1 3.14
Grenada -5.55 4.22 5.84 42.6 -0.5 18.9 -10.3 6.22 -5.46 -8.84 20.1
Guyana -8.7 -1.1 -10.1 1.66 -11.8 -1.32 -2.49 -22.6 -33.1 1.61 -1.07
Haiti 1.72 2.09 4.61 3.67 8.04 -6.48 -8.55 -4.34 -4.35 2.73 -12.9
Jamaica 8.23 7.65 15 0.69 -0.74 -4.48 -1.86 -9.11 -7.83 39.4 15.3
St. Kitts and Nevis 12.9 9.7 17.3 23.2 18.5 12 1.44 -6.63 -7.98 -11.3 14.7
St. Lucia -0.83 4.32 6.7 12.8 -2.12 5.8 1.03 -0.9 1.01 -1.3 9.4
St. Vincent & Grens. 16.7 0.94 0.65 2.17 1.82 5.94 2.74 -3.96 -9.28 2.57 5.53
Suriname 19.2 17.7 -17.4 -1.65 -7.61 -3.19 -3.54 -6.45 -8.41 -3.08 2.28
Trinidad & Tobago -1.95 3 3.16 -8.32 -6.94 -8.21 -3.78 -3.75 -3.75 11.4
Percentage point change in Debt to GDP level
US recession Global financial crisis
Coincides with major natural disaster
Governments come under pressure to borrow during periods of crisis
Source: IMF HPDD
Composition of debt has moved to shorter term domestic debt
External debt 200950.1%
Domestic debt 2009
49.9%External debt
200060%
Domestic debt 200040%
Move towards domestically owned debt exposes domestic financial systems to government debt repayment difficulties
Domestic and external debt of Caribbean 15
0 10 20 30 40 50
Guyana
St. Vincent & Gren.
St. Lucia
Belize
Dominica
Barbados
Antigua & Barbuda
Grenada
Jamaica
St. Kitts and Nevis
% debt maturing <1 year
Short term debt (countries ranked by 2009 debt to GDP)
Source: IMF Article IV, Staff calculations Source: IMF Article IV, Staff calculations
Debt creditors comprised of many different stakeholders
External Domestic
Composition of public debt in Caribbean 8 in 2009
Multilateral41%
Official Bilateral
18%
Commercial33%
Other8%
Arrears to Bilateral Creditor
0%
Central Bank2%
Private Domestic Banks41%
Nonbank Financial Institutions
5%
National Insurance Scheme
15%
Other28%
Arrears9%
Source: IMF Article IV, Staff calculations
Implied interest rates give a mixed picture
0 2 4 6 8 10 12 14 16
SurinameHaiti
Dominican RepTrinidad & Tobago
BahamasGuyana
St. Vincent & Gren.St. Lucia
BelizeDominicaBarbados
Antigua & BarbudaGrenadaJamaica
St. Kitts and Nevis
No clear pattern (Jamaica interest rates partially reflect high domestic inflation)
Belize, Dominica and Grenada underwent a debt restructuring before 2009
Past interest rate agreements do not necessarily reflect present risk
Implied interest rates on public debt (2009) (ranked by 2009 debt level)
Countries with debt above 60 percent
Source: IMF Article IV, Staff calculations
High debt service raises rollover risks
Debt service (interest + amortization) to total revenue (ranked by 2009 debt level)
0 20 40 60 80 100 120 140
GuyanaSt. Vincent & Gren.
St. LuciaBelize
DominicaBarbados
Antigua & BarbudaGrenadaJamaica
St. Kitts and Nevis
Percent of total revenue
High annual debt servicing needs can complicate government operational borrowing
Proj. FY10/11 (after debt exchange)
FY09/10
Source: IMF Article IV, Staff calculations
Cross country studies suggest an adverse impact of high debt on growth
Reinhart & Rogoff (2010):
At 60% Debt to GDP, GDP Growth reduced by 2%;
At much higher than 60%, GDP Growth cut to half
LDCs suffer more than DCs
Kumar & Woo, IMF (2010):
10% increase in public debt 0.2-.03 decline in per capita GDP growth per annum
Cheherita & Rother, ECB (2010):
Impact is non-linear, inverse “U”
Turning point is at 70-80% Debt to GDP
Caner, Grennes & Koehler-Geib (2010)
In emerging markets at over 64%, each additional percentage point of debt reduces growth by 0.02 percentage point.
Channels of debt-growth dynamics
High debt service burden can substitute critical social and productive capital expenditures
High debt levels increase cost of new borrowing through augmented perceived market risk of newly issued debt
Limited fiscal space for countercyclical spending that can exacerbate crises
Limited ability to respond to natural disasters
Constrained ability to borrow limits government ability to leverage private investment through public private partnerships
Relative growth performance was not unfavorable until around 2000, which coincided with rising debt levels in some countries
Growth performance was worse in high debt countries during 2009-10
-15 -12 -9 -6 -3 0 3 6 9 12
SurinameHaiti
Trinidad and TobagoDominican Republic
Bahamas, TheGuyana
St. Vincent & Grens.Dominica
St. LuciaBelize
GrenadaAntigua and Barbuda
BarbadosJamaica
St. Kitts and Nevis
2010
2009
Percentage change in GDP from 2000-2008 peak level of GDP in 2009 and 2010 (countries ranked by 2009 debt level)
Countries with debt above 60 percent
Countries with high debt levels mostly saw deeper contractions in 2009
The crisis deepened in 2010 in almost all these countries in contrast to low debt countries
Source: WEO
Fiscal space is limited in high debt countries
Source: IMF Article IV, Staff calculations
Towards a Way Out…
Things have been tried before…
Debt restructuring:o Belize (2007)o Dominica (2004-05)o Grenada (2005)o Jamaica (2010)
Debt write-off:o Guyana (2006-08):o St. Vincent & the Grenadines (2007)o Antigua & Barbuda (2004)
A Way Forward: “4 - 3 – 2” Framework
Comprehensive long term strategy to bring debt levels down to below 60 percent of GDP 4 pillars for reducing long term debt:
o Enhancing private sector growtho Improving fiscal managemento Mitigating fiscal impact of natural disasters on debt and fiscal
profileo Restructuring debt portfolios
3 instruments for debt restructuringo A: Debt buy-back operationo B: Debt for debt swapo C: Debt equity/asset swap
2 stage implementationo A and B can be done swiftly together with the sale of easily
valued government assets under Co Some privatization under C could take longer to implement
Enhancing private sector growth
Reducing Debt to GDP by expanding the denominator
Private sector is the hope for growth as high wage bills, limited fiscal space and high debt constrains public sector expansion
Barriers to private sector growth include:Business friendly environmentHigh costs of logisticsHigh energy costsLimited supply of human capital
Improving fiscal management
Boost the overall public balance by: Raising fiscal revenues – could move to more efficient tax systems
such as VAT Cutting expenditures but prioritizing growth enhancing capital
expenditure Exploiting cross country provision of public goods that will allow
reduction of costs through greater scale
Improve debt management through: control off budget spending and the issuance of public
guarantees improving audit capacity developing debt management strategies and risk assessments
Mitigating impact of natural disasters
Expand use of insurance such as through the Caribbean Catastrophe Risk Insurance Facility or self insurance through sovereign funds
Increase public investment in areas that increase resilience to natural disasters
Strengthen public investment planning and checks and balances. Long term investment projects may fall victim of short-term recovery projects, cutting long-term growth
Use of Cat-Bonds
Debt Restructuring
A: Debt buy-back operation, and/or B: Debt for debt swap, together with C: Debt equity swap/Debt asset swap
Principles of designEquitable treatment of all creditorsFair distribution of restructuring burden – eg. Countries
should, where possible, use their own assets to repay their obligations
A: Debt buy-back operation
Outstanding debt is bought at a discount with cash
Market values of debt of highly indebted countries is often well below net present value
Operation requires a source of cash such as long term loans from donors or funds from sale of government assets
B: Debt for debt swap
Swap of debt for bonds with longer maturity and lower interest rates
Donors or IFIs could guarantee these bonds to reduce creditor risk
C: Debt for equity swaps
Reduction of debt through sale of government assets through: A direct swap of outstanding debt for assets The sale of government assets and a subsequent debt
buy-back operation as under option A A debt for nature swap
Would involve: Listing of potential assets for sale Valuation of assets Put proceeds in an escrow account to meet obligations
Timing: 2 stages
Components that are rolled out relatively quickly: Debt buy-back and/or debt for debt swapSale of those assets whose value is known to the market and
easily sold
Those that require more time: For some assets an appraisal of value will have to be done
or major obstacles to privatization will have to be overcome. This could involve giving investors time to gather information about the specific industries and regulating frameworks