T&T’s children will inherit lower public debt if a plan by Minister of Finance and the Economy Larry Howai comes to fruition. He confirmed this in e-mailed responses to questions from the T&T Guardian. Howai said Government would hold in a “debt sinking fund,” the US$1.175 billion it made from the sale of Clico and CL Financial’s stake in Methanol Holdings Trinidad Ltd (MHTL) to German consortium Consolidated Energy Ltd (CEL). The plan was first revealed in an Oppenheimer (investment bank) October 15 report “for investors only.” Oppenheimer analysts wrote the report after meetings with government officials from T&T, Aruba, Panama, Costa Rica, Paraguay, El Salvador and Dominican Republic, who were attending the International Monetary Fund (IMF) and World Bank meetings in Washington from October 10-12.
Howai, who led the T&T delegation to the IMF-World Bank meetings, said: “We are in the process of putting the arrangements for debt reduction in place. The challenge that we face is that if we pay off debt now it will result in an exogenous increase in the money supply which will increase the level of liquidity and will raise the spectre of inflation risk. “We are therefore considering establishing a sinking fund which will offset the debt but not increase the level of liquidity in the system.” A sinking fund is formed by periodically setting aside money for gradual repayment of a debt or replacement of a wasting asset. Howai said: “We are developing the structure to facilitate that (a sinking fund) when the Central Bank begins the process of repayment, as the funds are now with Clico, which is under the control of the Central Bank. For the time being the funds (from the MHTL sale) have been placed in Treasury Securities by Clico.”
That explains why Oppenheimer said the government would receive the money in part cash and in part securities. Oppenheimer told investors: “The government expects to receive US$1-2 billion payback from its support to Clico (insurance company that collapsed in 2009 and represented a systemic risk for the country) in the coming 12 months; part will be in cash and part in securities. “As a consequence, international reserves will increase from the current US$10.4 billion,” or 35.1 per cent of gross domestic product (GDP) and over 12 months import cover—one of the highest in Latin America and the Caribbean. Asked about the new highest-ever, record-setting foreign exchange reserve level that the country will reach with the inflow of the money from the MHTL sale, Howai said: “The level of foreign exchange reserves has increased as the funds came in to the Central Bank last week and represents part of our strategy to build our financial buffers given the increased risk in energy markets.”
Oppenheimer also looked at the bonds T&T taxpayers will have to repay upon maturity and said: “While the government does not have big maturities coming due, authorities are considering using part of these funds to reduce net general government debt by four percentage points to 40 per cent of GDP by establishing a debt-sinking fund.” T&T’s next bond maturity date is November 30 when $700 million of public funds will be paid to bondholders who financed the government in 2006 at a coupon rate of eight per cent for eight years. Thereafter, around $84 million will become due on February 18, 2015, to bondholders who took the offer of the T&T government in 2000 to buy into an 11.4 per cent coupon rate 15-year bond that started off as $153 million.
Government has been bringing down the outstanding balance. The country’s next US dollar bond matures on July 1, 2020, and was debt sold by the government of the time—June 2000—at a rate of 9.75 per cent for 20 years. On July 1, 2020, bondholders will be advised by the Luxembourg exchange to collect US$500 million from T&T. Consistent with indigenous investment plans already announced by Energy and Energy Affairs Minister Kevin Ramnarine, Oppenheimer said, with regard to T&T’s state enterprises government, “authorities are considering how to boost Petrotrin capital expenditure but no decision is expected until after next year’s legislative elections.” On another topic, Oppenheimer said Republic Bank Ltd (RBL) “was transformed” into a state enterprise upon the Clico rescue, “but the government intends to disinvest from the bank in a responsible manner.”