Can Fiji pay its US$150m global bond?

Dionisia Tabureguci




As if managing a stressed foreign exchange reserves, declining sugar revenue, low export growth and mounting balance of payment are not enough, Fiji has another headache in its hands.
Paying off the five-year sovereign bond it had issued in the international capital markets in 2006.
Notwithstanding the benefits at the time, doling out the final payment can be quite heavy on the pocket of a small economy like Fiji.
All told, Fiji is looking at a bullet payment of US$150 million plus seven percent of that as final interest payment, all due in September next year.
Translate that to Fiji dollars and consider that any payment made would have to be accounted for in Fiji’s foreign exchange accounts, the scenario is enough to give the bean counters a few sleepless nights.
 “I would suggest it was a poor decision made at that time to supplement declining foreign reserves with offshore borrowing. They could have devalued in 2006 and achieved some results in 2009,” Finance Secretary John Prasad told FIJI BUSINESS.
Because raising a bond of that size—US$150 million, which is roughly F$300 million in today’s terms—you will always put pressure on your economy to pay that lump sum.
“I guess the better way in which to have done it would be to switch it in parcels and stagger it in stages so that the impact, when it comes to maturity, won’t have such a massive impact on your balance sheet,” he said.

F$3 billion
public debt
It’s a situation that has only added to the weight of Fiji’s public debt, seen by some as needing careful attention.
The International Monetary Fund—following its Article IV Mission to Fiji late last year—made a special mention of this while also recognising government’s efforts to reduce expenses and contain its 2009 budget deficit to 3.25 percent of GDP. This is despite an unexpected 10 percent fall in revenue. “
Central government debt, at over 50 percent of GDP, is high by regional standards.
In addition, government has contingent liabilities of around 15 percent of GDP. Fiscal consolidation is needed to reduce central government debt to the government’s target of 45 percent of GDP over the medium term,” the IMF team said in a statement.
The government, it its 2010 national budget delivered last November, estimated its total debt stock would stand at F$3.09 billion at the end of last year. 
In the context of the country’s total economic output, this translates to 51.9 percent of Gross Domestic Product.
Of that total debt (which excludes contingent liabilities), domestic debt—owed to domestic creditors comprising a range of financial institutions like banks, insurance companies and the Fiji National Provident Fund—was projected at F$2.533 billion.
A bulk of this, F$564.4 million is Fiji’s commitment to its international bond and the fact that it matures next year has been a point of concern for sometime, mainly because the government will have to find US$150 million from somewhere in order to settle the debt.
“The government, if smart, can manage this,” said Australian National University economist Dr Satish Chand, in an email interview with FIJI BUSINESS.
“They need to get one of the international financial institutions like the International Monetary Fund (IMF), World Bank or Asian Development Bank (ADB) to roll this debt over. 
“That way, they will save on costs of borrowing given lower interest rates and without putting pressure on the Fiji dollar,” Chand added.
Government in its 2010 Budget documents revealed that it expects to pay out a total of F$390 million in 2011 to service its external debt.
“Around 59 percent of the government's foreign debt will mature over the next two to three years. A substantial amount of this relates to the redemption of the global bond,” the Budget papers read.
The lingering question is: can Fiji pay?

Fiji can pay: Govt
Finance Secretary Prasad told this magazine that getting IMF or ADB to roll the debt over was not the only way the government could deal with its bond payment as other options “have been worked on for 12 months now.”
While not much was revealed, as government had yet to publicly release information on the options it has chosen, FIJI BUSINESS has been told the bond is backed by a sinking fund.
 “We have a sinking fund into which we put any surplus funds from government operations. For example, if we were expecting a dividend of $5 million and we get $9 million, the surplus is put into the sinking fund. This fund was set up from Day One, especially to pay for this bond when it matures,” said Isikeli Voceduadua, director at the Financial & Asset Management Division of the Ministry of Finance.
“We have around US$50 million already in this sinking fund and we are hoping that by September next year, it would have built up to sufficiently cover the US$150 million needed for the bond payment,” he added.
Fiji, the finance ministry stressed, has never defaulted on its debt repayment, whether it was towards a domestic or external debt obligation. And it was not about to start now.
“If anything, issuing the global bond only enhanced Fiji’s image as a credible borrower. You must understand that at the time the bond was issued, in September 2006, interest rates were so high and liquidity was so tight in the domestic market that we had trouble raising funds.
“The average interest rate for five-year bonds was 13 percent and 15 percent for 10-year bonds so, not only was it very difficult to get funds, it was also too costly.
“Going abroad was the only other alternative for us and less costly too,” said Voceduadua.
“The other good thing the global bond issue did was it widened Fiji’s base for future financing. We now have another option, which is going to the international capital markets to raise funds. And our repayment history is good, we have never defaulted on the interest payment of the bond—the annual interest payment is spread out over the year. Each year, we pay in March and September, and we have never defaulted on that. Our last interest payments will be March and September next year and that is within schedule,” he said.
The sinking fund, he said, is being held by the global financial firm JP Morgan, which  had acted as government’s broker for the bond issue.

Working on Fiji debt
If the sinking fund does meet the targeted US$150 million to pay off the international bond, Fiji’s external debt is expected to drop. It will also assist government in reducing its total debt to below 50 percent of GDP by 2012. 
Provided, of course, it does not issue another bullet bond, an option experts say Fiji is not likely to succeed in exercising because of the prevailing tight global market conditions.
According to Voceduadua, the government has no plans to borrow from abroad this year as it expects to source all deficit needs from the domestic market. 
“We will be raising about $490 million this year through bonds —that’s the total deficit in the 2010 Budget,” he said.
“We will be borrowing from the domestic market because there is sufficient liquidity there. You should also be mindful that there are limited investment opportunities for banks and financial institutions in Fiji.
“They look at government bonds as part of their investments. So whenever they invest in government bonds, they can maximise on their returns on investments.
“If we move away from the domestic market, it will kill our capital markets. We need money to be floating around in the economy, as one role of the government is to develop the capital markets. Our presence in the market stimulates activities and drives our equity markets,” he said
When asked whether Fiji could move away from borrowing in the domestic market and finance its deficits through more offshore loans, Voceduadua said: “Overseas loans are usually for project purposes, so whenever there is a road or wharf or jetty to be constructed, external loans are normally linked to that.”
And getting Fiji’s debt level down, while important, was also not just about ratios alone.
“At the moment, our total debt is around 51 percent of GDP and we have a medium term target from now until 2012 to bring down our debt level to below 50 percent. 
“But there is no benchmark. Different countries have different ratio. For example, Jamaica has a debt to GDP ratio of more than 100 percent. 
“There is a guideline set by IMF but it’s just a ratio. You can manage it by increasing your GDP or you lower your borrowings by lowering your expenses. 
“But from the debt management side, we are doing our best to make sure the risks are managed and also to advise government on the possibility of cutting down on expenditure. 
“The onus is on reducing the expenditure. Once you reduce the expenditure, you can reduce the ratio,” said Voceduadua.
The other way to do it too, said Prasad, was to “grow the GDP as per government’s 2010 vision to drive economic activity and grow the national pie.”
Debt against a growing GDP would naturally adjust itself as a percentage.
Fiji had issued its debut international bond on September 6, 2006, to raise US$150 million and received orders that amounted to around US$1.4 billion. The bonds were finally priced with a coupon of 6.875 percent to yield seven percent.
The exercise took Fiji’s historically low external debt stock from F$164 million (3.6 percent of GDP) in 2005 to F$416 million (7.6 percent of GDP) at the end of 2006.
The US$150 million raised was brought in to meet the Laisenia Qarase government’s forecasted 2007 Budget deficit requirements, as well as boost the low levels of foreign exchange reserves that prevailed at the time.