Rose­marie Sant

The re­cent float­ing of a $1 bil­lion six year bond to fi­nance re­cur­rent ex­pen­di­ture sig­nals that Gov­ern­ment does not have a clear and well thought out debt man­age­ment strat­e­gy, or even a broad­er strat­e­gy to en­gage in a healthy mix of fi­nanc­ing op­tions, econ­o­mist Valmi­ki Ar­joon told the T&T Guardian yes­ter­day.

He is al­so con­cerned that the coun­try has not been told how the new debt will be used. While in a broad sense the coun­try has been told the bond re­ceipts will be used for re­cur­rent ex­pen­di­ture there is no clar­i­fi­ca­tion on what it will be used for or the an­tic­i­pat­ed fi­nan­cial re­turns.

Ar­joon said the big ques­tion Min­is­ter of Fi­nance Colm Im­bert must an­swer is how the ex­pect­ed debt bur­den will stim­u­late in­dus­tri­al growth and eco­nom­ic trans­for­ma­tion.

The bond is­sue was more than three times over­sub­scribed, which Ar­joon said in­di­cates that in­vestors are "yearn­ing for av­enues that of­fer high­er and more com­pet­i­tive re­turns." How­ev­er, he be­lieves that "ex­cess liq­uid­i­ty av­er­ag­ing at $4 bil­lion in the fi­nan­cial sys­tem al­so ac­count­ed for this over­sub­scrip­tion."

"Ad­di­tion­al debt is be­ing raised im­pul­sive­ly," he said, adding that this may sig­nal that the econ­o­my is un­der-per­form­ing and that Gov­ern­ment has se­ri­ous doubts they will be able to raise the bud­get­ed rev­enue of $47 bil­lion for this year.

"So they are seiz­ing the op­por­tu­ni­ty to raise new fi­nanc­ing via added debt," he said.

The bond is­sue start­ed at $500 mil­lion and was up­sized to $1 bil­lion. Ar­joon said it is ap­par­ent from the up­size that debt can be raised from the lo­cal cap­i­tal mar­ket with lit­tle dif­fi­cul­ty. But he said such easy mon­ey can fos­ter the in­fa­mous ad­verse se­lec­tion and moral haz­ard is­sue, where there is less care with how fi­nances are spent and the risk­i­ness of some project. In the event of loss­es caused by risky de­ci­sions, he warned, Gov­ern­ment "may be in­clined to be­lieve they can eas­i­ly at­tain more mon­ey by rais­ing ad­di­tion­al debt to cov­er their loss­es."

Ar­joon spec­u­lat­ed that Gov­ern­ment might be tak­ing ad­van­tage of the over sub­scrip­tion and rais­ing more debt lo­cal­ly.

He said: "It is like­ly to be more ex­pen­sive to bor­row from the US in the com­ing year, giv­en the re­cent hike and the up­com­ing ad­di­tion­al hikes in the US in­ter­est rates." For that rea­son, he said, the state might be "less ea­ger to bor­row from the US and could pos­si­bly be sub­sti­tut­ing some planned debt fi­nanc­ing from the US mar­ket with ad­di­tion­al lo­cal debt."

The econ­o­mist said Gov­ern­ment needs to be mind­ful of "in­creas­ing the debt bur­den which will crowd-out fu­ture in­vest­ments and sav­ings, es­pe­cial­ly if the funds raised aren't put to prof­itable use" and es­pe­cial­ly in a sit­u­a­tion where the "debt bur­den is in ex­cess of 60 per cent of GDP, and very lit­tle is be­ing done to stim­u­late GDP growth."

"If poor fi­nan­cial plan­ning such as this con­tin­ues, es­pe­cial­ly when monies raised are not used to stim­u­late pro­duc­tive ac­tiv­i­ties and ex­port di­ver­si­fi­ca­tion, growth will be slug­gish and we will find our­selves in chron­ic fi­nan­cial tur­moil," he said.

Ar­joon said rais­ing debt in such a spon­ta­neous man­ner will con­tin­ue to dam­age the coun­try's fi­nan­cial rep­u­ta­tion and erode in­vestor con­fi­dence in the econ­o­my, tak­ing T&T steps clos­er to an­oth­er down­grade by cred­it rat­ings agen­cies.

Since the econ­o­my has de­clined by 4.5 per cent, Ar­joon sug­gest­ed less con­ven­tion­al fi­nanc­ing ap­proach­es. He said Gov­ern­ment has al­ready sig­nalled that it in­tends to raise finds through di­vest­ments of state as­sets such its 20 per cent share­hold­ing in First Cit­i­zens Bank and the Na­tion­al Gas Com­pa­ny's resid­ual 51 per cent share­hold­ing in T&T NGL Lim­it­ed.

"It would be more pru­dent to en­gage in these meth­ods and sim­i­lar meth­ods of eq­ui­ty fi­nanc­ing, as they suc­cess­ful­ly raise mon­ey with­out in­creas­ing the debt bur­den," he said.

Ar­joon fur­ther ad­vised that a small part of the sale be open to for­eign in­vestors to earn for­eign ex­change in the process.