reducing high debt in the caribbean

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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

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Page 1: Reducing High Debt in the Caribbean

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

Page 2: 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

Page 3: Reducing High Debt in the Caribbean

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)

Page 4: Reducing High Debt in the Caribbean

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

Page 5: Reducing High Debt in the Caribbean

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

Page 6: Reducing High Debt in the Caribbean

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

Page 7: Reducing High Debt in the Caribbean

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

Page 8: Reducing High Debt in the Caribbean

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

Page 9: Reducing High Debt in the Caribbean

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.

Page 10: Reducing High Debt in the Caribbean

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

Page 11: Reducing High Debt in the Caribbean

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

Page 12: Reducing High Debt in the Caribbean

Fiscal space is limited in high debt countries

Source: IMF Article IV, Staff calculations

Page 13: Reducing High Debt in the Caribbean

Towards a Way Out…

Page 14: Reducing High Debt in the Caribbean

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)

Page 15: Reducing High Debt in the Caribbean

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

Page 16: Reducing High Debt in the Caribbean

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

Page 17: Reducing High Debt in the Caribbean

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

Page 18: Reducing High Debt in the Caribbean

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

Page 19: Reducing High Debt in the Caribbean

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

Page 20: Reducing High Debt in the Caribbean

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

Page 21: Reducing High Debt in the Caribbean

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

Page 22: Reducing High Debt in the Caribbean

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

Page 23: Reducing High Debt in the Caribbean

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