16 de agosto 2018
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The Executive’s proposal to issue 9.035 billion Cordobas (over $280 million USD) in Bonds, and to request the creation of “Financial Stability Bonds (BEF)”, at times of high uncertainty (political, social, economic, etc.), far from propping up the desired “stability,” may rather lead in the opposite direction.
“The monetary, exchange and financial stability of a country is a public asset. Thus, a generalized rupture in this stability would have important economic and social consequences, so it should be duly supervised,” states the preamble of the bill creating the BEF and as well as a Financial Stability Committee.
“I see contradictory signs. The Government is running out of liquidity, due to lower tax collection, and knows that it cannot close the year, so it is forced to issue public debt in order to meet its obligations, but public debt today represents more taxes tomorrow, plus higher interest rates”, explained Giovanny Rodriguez, former President of the Public Accountants Association.
“People see that the economy is falling into depression, and the State confirms it! A budget reduction translates into policies to cut spending, investment and employment, and the natural reaction of economic agents is to assume that there will be liquidity problems and that the economic crisis will worsen,” so they could limit their investment options, while others may decide not to buy, or hire, or take risks, he stated.
“Basically, this sends a bad signal to those economic agents, who confirm that the State is running out of liquidity, in addition to the signs that show the deterioration of the national economy, which –once again- creates negative expectations,” Rodriguez said.
The market decides
An economist consulted by Confidencial considered that the reason for issuing the equivalent of more than 280 million dollars in bonds is, to a large extent, a way to recover the money withdrawn from the deposits of the Government’s Central Bank.
Like many other people, this economist wonders who will acquire these bonds, suspecting that agreements could be established with sectors that concentrate resources, such as financial institutions, investors and entrepreneurial groups, in exchange for not withdrawing privileges or not applying punitive measures.
Additionally, he questions whether there will be a sufficiently attractive interest rate that would allow market forces to act without having to coerce anyone.
Regarding this idea, Gerardo Arguello, manager of Nicaragua’s Stock Exchange, says that even though they have not finished analyzing the proposal of both bonds issued, he reminds that the debt issued by the government is always negotiable on the Stock Exchange.
In fact, public debt represents the bulk of the country’s primary market.
On the possibility that the government finds buyers interested in acquiring those papers, Arguello reminds us that “this is always decided by the market. The problem to answer that question is that at this moment we do not know what the sales plan will be and other details about the bond issue.
Indeed, the bill to create the bonds states that the “term and interest rate will be determined by the Treasury and Public Credit Ministry (MHCP), and may be placed through direct placement mechanism, or through auctions.”
Investors and stockbrokers are wondering if the Central Bank will be the one to place the bonds. They are also interested in knowing with what denomination, because that will indicate what type of investor the government is targeting.
Then there is the question of trust in the issuer (Daniel Ortega’s Administration) at the time of launching the bonds. Although Arguello refuses to enter into this thorny issue, he does point out that “I can only say that the Stock Market has not stopped making transactions every day.”
“For confidence to exist, it implies that people are determined to take risks. It is true that the volumes traded are lower, but there are always transactions.” Another thing is that the yield of operations in the stock exchange are rising, which means that “there are people willing to invest, but at higher rates,” he explains.
Another way of saying it is citing the axiom that every investor should know: the higher the risk, the higher the returns; and as Arguello reminds “the most well-known rating agencies have spoken in favor of increasing the country’s risk, and that is reflected in higher returns.
“What you have to see is to what extent investors will continue to move the market, while this offers them the returns they want,” he added.
A desperate measure
Three other economists consulted by Confidencial focused on different aspects of this initiative, beginning with the fact that “issuing bonds for 9 billion Cordobas is a fairly large and ambitious placement, even perhaps a desperate one.”
For Nestor Avendano, President of Consultants for Economic and Social Development (Copades), the creation of this committee (and the Bonds) of financial stability “is a transitory solution. We cannot indebt citizens, because this debt will be too heavy” in a very short time.
This expert warned that “we can face in the medium term, an explosive situation regarding the total public debt, when the payment of interests and principal of both debts is added, with the aggravating circumstance that in the last two years a new external public debt has been contracted with the Central American Bank for Economic Integration (CABEI), at non-concessionary terms and in a shorter period of time.”
“The fulfillment of all those obligations (including this massive issuance of paper to finance fiscal and quasi-fiscal deficits (INSS), would allocate less resources to social sectors, via the national budget,” indicated Avendano.
His colleague Roger Arteaga, former head of the DGI (tax collection entity), points out that we are dealing with 25-year bonds that will go to the stock market to secure dollars, although they will be payable in Cordobas, so he doubts that buyers will be found, unless we are dealing with foreign speculators.
In this regard, he reminds us that during the 80’s crisis, speculators bought Nicaraguan foreign debt at seven cents per dollar, and afterwards they appeared to demand from the Nicaraguan Government, headed by Violeta Barrios, pay the total value of the bonds that they owned, so we could not rule out that it could happen again.
