Ved Seereeram

I had written some time ago about economists misleading the country about the relevance of the debt-to-GDP ratio as a measure of calculating the country’s capacity to assume more debt. An article published on June 6 titled “Banks: Sovereign Debt Under Control” caught my eye. I was disappointed that the banks have joined the economists in misleading the public regarding the country’s ability to borrow. Already the country cannot pay its debt and a mountain of debt is at the stop light waiting to be counted. VAT for example?

The article begin by saying, “There is no cause for concern when it comes to the public debt of T&T. This is the position of managing director of Republic Financial Holdings Limited, Nigel Baptiste.” Baptiste went on to ask and say “Why do you think there is a high concentration of sovereign debt in T&T? The Government debt-to -GDP ratio is 62 per cent. A debt-to-GDP ratio of about 62 per cent is not bad in the scheme of things.”

Baptiste was also quoted as saying, “So right now Trinidad is still in a reasonable place at 62 per cent. I think normally you would want it to be lower than 65 per cent. I wouldn’t even begin to become concerned until Trinidad goes north of 65 per cent. And even then, it will probably be a ‘watch’, rather than a concern. If it starts to get up into the 80 per cent region, then I have reasons for concern”.

Shareholders and citizens of Trinidad and Tobago should have serious concerns with the statements by Baptiste for several reasons. Looking at the debt-to-GDP ratio to set credit limits for the country is wrong and lacks any risk assessment to determine if the country can repay. Since Baptiste seems to be an expert on the debt-to-GDP ratio maybe he can answer the following questions which were also posed to economists in T&T:

1) How does the bank determine the borrowing capacity of a country by looking at the debt-to-GDP ratio?

2) Should debt include all government liabilities?

3) Why only what the government owes to banks included in debt and not other liabilities such as VAT refund, amounts overdue to contractors, amounts overdue to cane farmers etc. as is normal when banks do their credit evaluation for loans to companies and individuals. I do not recall the banks asking a company, “What is your debt-to-GDP ratio” when assessing credit. I also do not recall banks confining the definition of debt to only bank debt when considering lending to the private sector.

4) If two countries have the same debt-to-GDP ratio but one country’s contribution to GDP is only 10 per cent while the second country’s contribution is 50 per cent then which country poses the higher risk?

5) Why is the debt service coverage ratio not used to determine the borrowing capacity of governments as is used to determine the borrowing capacity of the private sector clients?

The Government is running a deficit and is not in a position to borrow more than what is already on the books. Baptiste is suggesting that he would only be concerned if the ratio goes to 80 per cent and above. That means additional borrowings of around TT$30 billion. Currently the Government is not meeting its current debt service from current revenues and is relying on additional borrowings and supplier credit (not paying its bills). The economy continues to shrink and the tax base is also shrinking for the Government. All the trends are negative but Baptiste is not concerned.

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Shareholders of Republic Bank should be very concerned about the flippant manner in which the bank evaluates lending to governments and no doubt the bank’s losses in the Caribbean have been substantial. Hopefully the Board of Republic Bank would have a different position from Baptiste and if so they should come in the open and tell us.

Baptiste should also clarify the following points as they are vague and confusing:

1) What exactly is meant by, “A debt- to-GDP ratio of 62 per cent is not bad in the scheme of things.” What scheme of things and what are the criteria for determining a good or bad ratio?

2) If at 62 per cent it is “normal” what magic happens at 65 per cent for Republic Bank to place the country under watch?

3) He mentioned that there is no concern at 65 per cent but yet the country will be placed under watch. It is my understanding that because of some concern, little as that may be, is the reason why the country will be placed under watch. Perhaps Baptiste can clarify.

The debt-to-GDP ratio cannot determine a country’s capacity to borrow and it is the most single misleading indicator that is plunging countries into the debt trap. There are other practical ways to determine a country’s borrowing capacity such as the debt service coverage ratio and it is time we immediately stop using the dangerous debt-to-GDP ratio. Bankers have the responsibility of giving proper direction, not in joining the chorus to mislead.


T&T has recently been downgraded in its currency sovereign rating by Standard and Poor’s…