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.