The Pros and Cons of Government's Huge Global Loan

WEEKEND READING. ♦ Allen Lockington column
♦ For discussion — People's Charter Pillar 2 
♦ Critical Engagement and Future Scenarios (Part 2) by Akuila Yabaki. 
I would rate Akuila's comments as "essential reading".
There will be no 6pm posting today.

By Crosbie Walsh 
Photo: Fiji Village. Posting N204.

Government has announced that it has been successful in raising a 5 year international loan of US$250 million (F$500m) at 9%. Some 60% the loan will be used to repay the US$150m (F$300m) borrowed in 2005 by the Qarase government which is due for repayment in September. The remaining US$100m will be used to finance priority capital investments earmarked in the 2011 Budget to generate economic activity, macroeconomic stability and a prudent fiscal position in the medium term.

The new loan is not uncontroversial. A reader says “At 9% interest (three times the going rate) and the way this is structured will always bring out the lenders of last resort. If it is a test of anything it is a test of regime desperation and market greed for the desperate.” Possibly, but there is no single “going rate”.

Rates depend on each county's circumstances and the global bond market at the time. Today's rates, for example, vary from Australia's 5-year bonds at 5.2%, to Russia's at 7.4%, Brazil's at 7.9% and Greece's at 12.9%. Given the small size of the Fiji economy and its current low growth rate, the European sovereign crisis, unrest in the Middle East and skyrocketing fuel prices, the interest rates does not seem excessively high.

Besides, Government had little choice. The Qarase loan had to be repaid by September and its rate, raised in far more favourable global circumstances,  was 7%, a sizeable rate at the time.

The global loan transaction was launched in Asia on Tuesday and was almost three times oversubscribed within 12 hours. Asian investors bought 36% of the transaction with Europe and Offshore-US accounts contributing the remaining 64%. Some 43 investors from 6 countries were involved. The order book comprised of 69% asset managers, 24% hedge funds, 5% private banks and 2% bank portfolios.

Critics point to the “greed” of the investors but such a diverse group would be unlikely to invest in a sinking ship.

Just as predictably the PM saw the oversubscribed loan as an “indication of the level of confidence that investors in the international market have in Fiji’s economic development and progress, on-going reforms and future prospects.” It is, of course, a qualified confidence; the usual attempt by investors to balance returns against risk. But their calculation of the risks is certainly less than the doomsayers would have us believe. And from Fiji's perspective, whether it is a wise or unwise loan will only be known by how the money is used. Investment in capital works has the potential of repaying loan interest many times over.

Main Sources: No:0577/Finance and three Fiji Times postings on the topic, click here  One  Two  Three

Comparison of place and time

Several observers have expressed concerns about the high level of debt, especially when the Fiji economy is under-performing, and anti-government people have blamed government mismanagement. Seen in perspective, however, overall government debt of 57.7% of GDP in 2010 does not compare too unfavourably with 44% in 1990, 70% in 1997 and 71% in 2000. (Accounts and Finances of the Republic of the Fiji Islands.) Government loans due for redemption under the Qarase government in 2005 totalled $125m; between 2006-2010 they averaged $100m, and from 2011-2015 average $30m, though recent borrowing will increase this total.

Emma Veve of the Asia Development Bank has noted Fiji's economic growth is poor relative to most other Pacific countries but she expected GDP to improve with increased tourist earnings, and once government reforms start to produce results. She spoke of the need for more access to land for investment, an issue being addressed with the Land Bank and investments in the country's mineral resources. Government thinks the public service reforms will have positive economic results.

The recently released Reserve Bank Economic Review for February (see right sidebar) points to mixed results. Economic growth for 2011 is expected to be 1.3% but the trade deficit has been reduced by 6.8%, with exports increasing 17.1% and imports reduced by 2.9%. A substantial increase in export earnings from minerals, and steady earnings from mineral water, fish and timber, seems likely. This year's disastrous results from the sugar industry, mainly due to faulty machinery, can get no worse, and minor gains should occur next harvesting season. Inflation increased from 5 to 5.9% mainly due to the increase in VAT (and it could increase further as a result of this month's sharp increase in world oil prices) but foreign reserves are sufficient to cover 4 months of imports.

Government, of course, has no control over the price of world oil, and limited control over its exchange rate (the loans are in US dollars). The economic situation is not improved by international reactions to the political situation and Government is one party to this picture but it is

It would need to have borrowed less if capital works had not been neglected for so long; if its “traditional friends” had been more helpful; if it had not been so bull-headed; if its dismal PR improved by even 1.3%; if more money were available from domestic sources. But it would have needed to borrow more than has been borrowed before if the Roadmap's infrastructural reforms (roads, bridges, sea and air access, agricultural and rural sector development) are to be carried out.

The loans —the Global Bond loan is one of several— are intended in part to patch up the Fiji economy but they are also bent on transforming it. The critical issue is not the size of the loans but whether five, ten and more years on we see a more robust and diversified economy, fuller use of Fiji's natural and human resources, appropriate levels of investment and more employment.

Rome, my elderly neighbour used to remind me, was not built in a day and the same is true for  all long-term visions, plans and projects, no less and no more in Fiji than anywhere else.
Postscript. Another perspective on Fiji's borrowing. "China's investment in New Zealand government bonds is understood to be rising but just how much it holds remain a mystery, according to the Treasury. Asian central banks and state superannuation funds are also investing more in New Zealand as Asian investors shy away from financially troubled European states. New Zealand is competing to borrow about $300 million every week  ...Treasury [is aiming] to raise $13.5b this financial year..." Click.


Raise cash AND cut spending said…
Investors are confident they will be repaid in 5 years time. This is quite different to believing the current government is taking Fiji forward and it is not an endorsement of the military government as the PM would have us believe.

Your rate comparisons are not accurate because you are comparing different currencies. We currently have a low rate environment and at 9% this bond is more than 3 times the going rate for US government bonds.

What investors are saying is "Fiji is high risk, higher than it was fours years ago but on balance not about to fall over so I'm happy to take a great return over the next five years".

The question is will the balance raised really go to infrastruture investment or recurrent spending.

I beleive this government would have a lot more credibility if at the same time as raising money offshore it announced some serious cost saving measures and a very good place to start would be the military. A 20% per annum cost target could easily be achieved and apart from the savings it would show the world and local critics that the RFMF is not some sort special club above the law and beyond touch of the tough decisions required to truely get Fiji's financial situation under control.
Email or ring the the ADB in Suva for the economic report Croz. They are in the same building as FHL. Sorry have deleted the circulated one already.

One positive for Fiji was Tourism. I credit this to a very active industry who didn't lie down but have fought hard since the coup including meeting and lobbying government at all levels. When Mahen was finance minister he was out to crush the tourism operators because he has never beleived in tourism and thinks they are all crooks.

To the industry's credit they let government and the AG take all the credit for tourisms performance. Now thats real politics !
Alternate funding said…
A good question to ask the acting RBF governor, Finance Minister (PM) or Sharon is why the government did not take up the opportunity to borrow these funds from the IMF at significantly lower rates ? I suspect it is because the IMF usually requires committments to reform and transparency in where the money is spent but lets see if we can get a reason from someone in government.

By the way some have critised the ANZ's role and Noram Wislons in raising the money. All I can say is thank god it wasn't our PM doing the talking. When he and I where involved in Suva rugby he couldm't even understand a basic P&L.
Alternative said…
Actualy Government did have a choice. They could have looked internally for savings of $25-50million per annum. Not easy but very doable given they have absolute power and can simply decree away any of the usual obstacles like public opinion, unions, previous agreements etc. Then they could have issued a much smaller bond.

Another alternative was to take up a line with the IMF but rumour is that meant being more transparent about government spending and commitments the PM could not make AND maintain his total control over everything in Fiji.
ouch said…
Lets hope the Fiji dollar is not devalued again in then next 5 years because fiji $500m could quickly become $600m, 700m or $800m.

As it is Fiji will be paying F$269m in interest on this bond over the next 5 years. Ouch.

Still the could news is no doubt the RFMF will not suffer any headcount loss, get more pay rises and promotion an will get some new gear to play with and hopefully that has a positive impact on the local economy (if they spend/buy local).
Questions said…
A good question to ask after four years is what infrastrucure has actually been built in the last fours years by a government with unprecedented power ?

Then ask what faith do you have in this government spending the new money effectively over the next 5 years ?
map said…
Still banging on about the roadmap...remind when we will get to see it again ?
yea yea said…
The scary thing is that the PM/Finance minister and AG probably believe what they are saying about this being a glowing endorsement of thier military government. Guys, please have a look at your GDP projections for the next 2 years. Only Tuvalu is forecast to do worse. If this is the great economic progress of your government compared to previous governments we should all be very worried.

Keep pumping out the positive spin Fijitime, Fijisun and other....
this blog said…
Isn't it crazy that to read any reasoned or balanced comment on what is happening in Fiji readers need to turn to a New Zealand based blog site run by a retired NZ professor ?

Is this the great indepedance and self respect Fiji is looking for. For all the cries of we are a soverign nation and deserve respect we don't even allow ourselves that respect.
Peter said…
Sorry Cros
It's a common error made by non-bankers but you cannot compare bond rates in different currencies! The FJ USD Govt borrowing should only be benchmaked against other USD rates.
The US 5 year bond (yield) rate is just over 2%! So FJ is in fact paying a very substantial (junk) premium to get this issue away. Particularly when you compare the pricing on the previous FJ Govt issue against rates currently prevailing at that time...USD interest rates have fallen considerably since with the GFC but the rate on this FJ bond issue has increased substantially.
US Treasuries are currently yielding almost 0% so its no wonder investors are taking a punt on an issue with a 9% coupon!
Losing Out on GDP? said…
Rationale is right: the will to raise money through bonds must demonstrate the will equally to cut costs and to curb inflation. To some extent that has been done but it is still apparent that the population at large is insufficiently informed about macro economics and not well informed about micro either. Financial literacy must be instilled to bring full accountability and demands for transparency. Then, we might have an economy which would begin to deliver. GDP must come up to 6% minimum. That is what our immediate competitors have. Until we achieve this or a Mauritian steady 5% over decades, we shall lose out.
Anonymous said…
Government is already saving money through operating on a lean Cabinet and downsizing the civil service.It's investment in infrastructure is loud and clear.The Tourism sector is on a roll. Export of minerals will soon increase and mahogany is slowly but surely getting there. Developments in agriculture are postive. Besides, just like Australia, the US and numerous other countries in the world we have an amicable relationship with China. What more positive signs do investors need ? The number of pessimists and cynics in the country is hardly a reason not to invest.
Anonymous said…
According to Dr T.K.Jayaran,USP, in his regular column in the Fiji Times today, p 16, " The improvement in S&P's rating of Fiji two weeks ago from 'stable' to 'positive' in regard to international currency reserves was a major factor in influencing investors' decision." And he echoes the Prime Minister's view that the successful bond issue is a 'clear indication of the recognition of Fiji's credibility as a credit worthy nation.' Well Standard and Poor's change their ratings based on facts on the ground and not on the fiction being spun by 'experts'such as Wadan Narsey whose spin is
good enough only for Coupfourpointfive.
Yea yea said…
Croz are you allowing anon comments now if they are glowing endorsements of the junta ?

@ anon - you are reading too much local press or your work for frank. If gov is serious about saving it would start by slashing the military as to investor confidence they would engage with au and nz not throw out reps.
Anonymous said…
Much is being made in some quarters of S&P's B rating of Govt's loan. Aren't they expected to be always ultra conservative and in Fiji's case more so with our current political situation. The ratings could have been lower or higher but hedging their bets they've placed it at B - not bad, some experts believe. What we optimists believe is that this government is capable of fulfilling all the requirements of the loan.
Bankers, Banking and GDP said…
@ Anonymous

An improvement in Fiji's rating on S & P to 'Positive' is one good thing but is it sufficient? GDP must be boosted and assured in a positive direction. Without this, there is no reliable, sustainable encouragement for investors to return in the SMB area. It is Small and Medium-size businesses which grow economies to the 5% sustained rate of growth akin to that of Mauritius. This has to be achieved. We are still erring in our understanding of business: "Not all businesses are the same". They must not be critically assessed as similar. Their requirements are quite dissimilar and bankers must be brought to addressing this: whether they like it or not! Tomorrow's report from the Consumer Council of Fiji is eagerly awaited. Long overdue.
Anonymous said…
Since the loan period is five years we might as well have elections moved to the year after repayment - 2017 to make sure this regime is accountable for its payment.
Anonymous said…
Why slash the Military ? Should there be a natural disaster of epic proportions we need them at hand. Besides, military engineers are doing useful work on infrastructure development.
Union said…
Croz - all the anon's seem to be pro military government is thatcwhy who have changed your mind and let them all through ?
Anonymous said…
Bankers, Banking and GDP - From this morning's Australian news - Japan's debt equivalent of 200% of GDP. Please explain in relation to Fiji's.
reduce military said…
At anon - simple they (RFMF) are the least productive of all government. They sit around and, training training at best. Not suggetsing closing but trim 20% of costs. It might help reduce future coups as well.
Anonymous said…
Union - Is this supposed to be an anti-govt site? Can we have the figures for anti and pro govt comments thus far if you have been keeping count. Don't be childish and ridiculous and grow up.
Banker said…
@ Anon commenting on GDP - Please use a name.

Japans debt is very different to Fiji's because it is held by individuals. Japan has one of the highest saving rates in the world. Fiji one of the lowest. Fiji's government owes money to individuals in Japan. Fiji's government owes money overseas.

That said Japan knows it has to reduce spending. Although this week is not the time !
Croz Walsh said…
@ reduce military ... fair comment but don't forget the work now being done by the military in government and engineers in rural areas.

@ Peter ... Were none of my comparison countries in US dollars? What other countries' loans are in US dollars? The US is hardly a fair comparison.

@ Yea Yea and Union ... Read under "Leave your commment." You will see the Anonymous reference is no longer there. It's still better to use a name or pseudonym but it's no longer obligatory. The main reasons for the change are that many readers didn't stick with their pseudonym and the introduction of numbered posts.
Anonymous said…
Banker - Thanks for the info on GDP. I will retain my democratic right on this site to remain anonymous.

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