The Impact of the Debt Restructuring

Barbados’ public sector debt stock accumulated rapidly between 2008 and 2017. Inclusive of arrears for tax refunds and payments for goods and services, debt exceeded $14.8 billion at September 2018, compared to approximately $7 billion in 2007. This increase raised the debt ratio above sustainable levels as Government diverted spending towards servicing debt, even as Barbados suffered multiple credit rating downgrades and reduced access to international capital markets. At the same time, the international reserves deteriorated as the Central Bank funded external debt repayments while its reserve buffers fell due to a combination of weak earnings and subdued private capital inflows. 

In June 2018, the new administration announced its intention to restructure the public sector debt in order to create fiscal space and facilitate the rebuilding of the international reserves. All debt obligations were rescheduled with the exception of bilateral and multilateral liabilities as well as savings bonds.

The restructuring was addressed in two phases. First, Government concluded a domestic debt exchange in November 2018 for its Barbados dollar-denominated debt and that of several state-owned enterprises (SOEs). The principal balances of bondholders were protected, except for the Central Bank of Barbados and the National Insurance Scheme, both of which suffered losses in their principal values. In addition, intra-public sector arrears were eliminated along with the lifting of some guarantees on contingent liabilities. These actions resulted in a reduction of the stock of domestic debt from 128 percent to 90 percent of GDP by December 2019.

Secondly, having instituted a moratorium on payments on its commercial U.S. dollar-denominated debt, Government exchanged some of these instruments for new bonds in December. The restructured debt, inclusive of capitalised arrears, included Government’s Eurobonds and its Credit Suisse facility. The new bonds, issued with an effective reduction of 26.3 percent in the aggregate sum of all outstanding liabilities as of October 1, 2019, totalled US$563.1 million. The agreement provided for staggered upfront payment of the capitalised interest equivalent to US$40 million, the first tranche of which was made in December.

Key characteristics of the new external long-term bond include a final maturity date of October 2029, a five-year grace period on repayments of original principal, buybacks, equal semi-annual principal amortisations commencing in April 2025, a fixed annual coupon of 6.5 percent and a natural disaster clause which would enable Government to capitalise interest and defer principal maturities due on the new bonds for two years in the event of a natural disaster. A similar clause is included in the domestic restructured bonds and is intended to facilitate relief in the event of a natural disaster.

Bond prices for Barbados’ debt, which fell below 50 percent of their initial issue value when the debt restructuring was announced, have risen since the reform program and the debt exchanges. By year-end, Barbados’ credit rating by Standard and Poor’s had risen from default to B-. The new bonds were being quoted at or close to par rather than the discounts of between 10 to 30 percent that existed under the pre-default environment.

The debt-to-GDP ratio now stands at 119.5 percent and the restructurings carry the attendant benefits of longer maturities and lower average coupon debt for both the domestic and international bonds. The annual interest to revenue ratio for FY2020/21 is estimated at 10.3 percent, compared to 26.9 percent in FY2017/18. The favourable impact on cash flows is evidenced by the projected debt service to revenue ratio of 25.5 percent in FY 2020/21 compared to 61.7 percent in FY 2017/18.

Achieving Government’s commitment to placing the debt on a downward trajectory that would reduce the debt ratio to 60 percent by 2033 is premised on sustained fiscal discipline, lower interest costs, a resumption of economic growth and the gradual retirement of debt. These improvements should provide the platform for future upgrades in Barbados’ credit ratings, create a more investor friendly environment and contribute to the resumption of sustainable growth.

Reproduced from the Central Bank of Barbados’ Review of the Barbados Economy in 2019.