Government of Seychelles

Transcription

1 Government of Seychelles DEBT RESTRUCTURING REVIEW Small States Forum, Washington DC, Sep 24, 2011

2 Summary: comprehensive debt restructuring A fiscal and BoP crisis in 2008 aggravated a severe debt overhang: The public debt stood at around $1 bn, or almost 150% of forecast GDP Nearly $300 million was in arrears to all categories of creditors Reserves were nearly exhausted and the country s rating was SD Within two years Seychelles had restored debt sustainability by concluding restructuring agreements that cancelled $310 million (a third of GDP), and rescheduled the remainder over extended periods at low rates of interest The Paris Club provided an exceptional 45% stock write-off deal A commercial debt exchange cancelling 50% of the stock achieved 100% participation after the use of CACs, avoiding creditor litigation The above agreements were secured despite our middle-income status and other challenges 2

3 Summary: presentation overview This presentation provides background on the comprehensive external debt restructuring process that was part of an IMFsupported economic reform programme After reviewing the origins of the debt problem, the presentation will discuss key challenges to the process and the strategies used The presentation will then outline the results before concluding with the lessons that we believe are offered by our experience Please do ask questions at any point 3

4 I. Background Evolution of the debt problem

5 Origins of the debt The growth in public sector debt in the run-up to the 2008 BoP crisis was driven in large part by a fixed exchange regime and ongoing fiscal deficits, which combined to create chronic shortages of foreign exchange Before 2000, the Government borrowed almost exclusively from Paris Club creditors and multilaterals Public debt increased significantly after 2000 through commercial borrowing from banks and bond markets, even as much of the official debt was going into arrears A critical turning point was the $200 million Eurobond issued in 2006, which carried a 9.125% coupon and a five year bullet maturity In several private placements and loans provided urgently needed cash, but were expensive and at times complexly structured. Such financings also concentrated material amounts of debt in the hands of a small number of commercial creditors 5

6 Evolution of the debt (cont) To place the Eurobond in perspective, the bullet maturity represented a staggering 29% of 2006 GDP or roughly 100% of revenues when issued No other recent first time issuer has raised more than 10% of GDP INITIAL SOVEREIGN EUROBOND BY SIZE (% GDP) Year Size ($ mn) Size (% GDP) Maturity (years) Yield at issue SEYCHELLES % Gabon % Georgia % Fiji % Ghana % Sri Lanka % Ecuador (1) % Senegal % Vietnam % Pakistan (1) % Indonesia % (1) Excludes Eurobonds issued by countries as part of previous debt restructurings 6

7 Debt reaches a tipping point In 2007 and 2008, the sharp rise in global commodity prices exacerbated high import costs and depleted reserves to less than a month s imports The current account deficit reached 52% of GDP in 2008 Reserves dropped to almost $10 million in September 2008 the same amount as the coupon payment due on the Eurobond the following month Consequently, the build up of arrears gathered pace and eventually affected all external creditor categories, including multilaterals By the time the Government launched its ambitious reform programme in June 2008, it had become clear that a comprehensive restructuring of the external debt would be required in order to: Restore the financial viability of the country Clear accumulated debt arrears in a manner that was transparent, fair, and above all, consistent with the country s payment capacity; and Share the burden of adjustment with creditors in an equitable manner 7

8 Pre-restructuring public debt snapshot: stock At the end of 2008, the debt burden was forecast to hit 150% of 2009 GDP with interest at 25% of revenues, ranking Seychelles as the 2 nd highest debt burden in the world using today s figures This is ahead of even Greece and three times the average for emerging markets External debt amounted to $760 million of which 35% was owed to official bilateral creditors, 7% to multilaterals, and 57% to private creditors WORLD S TOP 5 DEBT BURDENS (Rated Countries) Year Debt GDP Interest Revenues 1. Japan DEBT BY CREDITOR (% TOTAL) Non-PC Bilateral 15% Banks 16% 2. SEY PRE-RESTRUCT. 2009F Greece Lebanon Paris Club 20% MDBs 7% 5. Jamaica 2010/ Source: IMF, Fitch Ratings Bonds 42% Source: Ministry of Finance 8

9 2008 public debt snapshot: creditors Commercial Debt 71% of private sector debt was in the form of publicly and privately placed securities Bonds, 71% Loans, 29% The balance of private sector debt was in the form of commercial bank loans Official Bilateral Debt 62% of official bilateral debt was owed to the Paris Club France was the largest bilateral Paris Club creditor with approximately 43% of Paris Club claims Eight countries not represented in the Paris Club had claims totalling $116 million as of December 2008 Other PC, 10% United Belgium, 10% Kingdom, 10% Japan, 7% Italy, 11% Germany, 12% France, 41% Multilateral Debt 7 multilateral institutions had outstanding facilities The African Development Bank (AfDB) was the largest multilateral creditor with approximately 31% of claims OPEC, 24% IFAD, 1% Shelter Afrique, <1% OFID,17% Other, 7% AfDB, 31% Islamic Development Bank, 17% BADEA, 20% EIB, 6% Source: Ministry of Finance 9

10 2008 public debt snapshot: financing gaps External financing gaps were severe rising to 35% of GDP when the bullet maturity hit before being replaced by modest surpluses These gaps were before repayment of arrears amounting to 30% of GDP was factored in 2009f 2010f 2011f 2012f 2013f Residual External Financing Gap ($mn) as % GDP US$ million Arrears Source: IMF, Ministry of Finance Bonds Banks Bilateral- Other US$ million Bilateral- Paris Club Amount Available vs. Scheduled Debt Service Amount Available Scheduled Debt Service

11 II. Strategy Challenges and a way forward

12 Challenges to the restructuring 1 Scale. The magnitude of the relief required to place the debt on a sustainable footing would almost certainly be opposed by a majority of creditors. 2 Arrears. Sizeable and often long-standing arrears complicated creditor-debtor dynamics, and exposed Seychelles to litigation risk 3 Expectations. Creditors were relatively unaware of the challenges facing Seychelles at the start of the process; many had never visited outside high-end hotels 4 Credibility. Limited communication with bondholders as problems mounted, a history of arrears accumulation, and a lack of experience in negotiating with the IMF caused some to doubt the capacity to execute reforms and normalise relations with creditors 5 Creditor base. Creditors were highly fragmented, especially in the case of the Eurobond, leading to problems in implementing a consensus-driven approach 12

13 Challenges to the restructuring (cont) 6 Middle-income status. The only middle-income countries to have benefitted from a debt write-off from the Paris Club were those with major geopolitical influence, such as Iraq and the former Yugoslavia. The Paris Club s Evian Approach was still largely untested in the case of middle-income countries facing severe debt difficulties, yet with limited geo-political clout 7 Phasing. The Government had to decide early on whether to approach its official bilateral creditors and commercial creditors simultaneously, or to pursue a strategy which would have seen one group of creditors effectively setting the parameters for others 8 Creditor in administration. The bankruptcy of our single largest commercial creditor, in September 2008, complicated the restructuring of the commercial debt as negotiations had to be conducted with administrators who were motivated by a different set of factors to other creditors. The presence of insurers behind a number of other facilities created a similarly complex dynamic 13

14 Government debt strategy The restructuring process was a part of a comprehensive reform effort, and was guided by three key principles: Transparency Full and open dialogue with creditors Inter-creditor equity The process was launched only once several prior actions under the forthcoming IMF arrangement were complete and a commitment to generate sizeable primary surpluses going forward was in place Seychellois recognised that they had to take their share share of the adjustment pain as they approached creditors The Government initially approached bilateral and commercial creditors in parallel before moving ahead to conclude an agreement with the Paris Club first Given the foreign exchange crisis and to preserve inter-creditor equity, domestic creditors holding claims in foreign currency were included in the restructuring 14

15 Government debt strategy (cont) Early bilateral soundings with members of the Paris Club sought to explain the genesis of the reform programme and the Government s approach to place the debt firmly on a sustainable footing The Government held two rounds of roadshow -style discussions with private creditors across Europe and beyond after the launch of the IMF programme These efforts succeeded in establishing lines of communications with commercial banks and holders of almost 80% of the face value of the outstanding bonds and notes Discussions included the possible structuring options for a new instrument that would place the country s debt firmly on a sustainable footing in conjunction with a comparable effort on the part of bilateral creditors 15

16 III. Implementation Managing risks

17 Paris Club agreement After its initial consultations, Government decided that conditions for a formal approach to the Paris Club were right, and quickly entered into a multilateral negotiations with the Club on the basis of the Evian Approach with a focus on debt sustainability The largest creditors were key drivers of the process and had followed the impressive early results of the reform programme in detail In March 2009 the IMF completed a critical debt sustainability analysis on behalf of the Paris Club with the support of the Government The study indicated that even a 33% up-front reduction in the stock of external commercial and bilateral debt would leave significant residual financing gaps postrestructuring 17

18 Paris Club agreement (cont) In April 2009, the Government of Seychelles reached an exceptional agreement covering approximately $160 million in bilateral debts owed to eight countries represented in the Paris Club, plus one non-paris Club official bilateral creditor that joined the negotiations on an ad-hoc basis The agreement provided for an overall nominal debt cancellation of 45% to be applied to the outstanding stock (including arrears) in two phases The debt remaining after cancellation is being repaid over 18 years (final maturity in 2027) on the basis of a graduating amortisation schedule which includes a five-year grace period The Paris Club provided additional short-term cash flow relief in view of the difficult financing situation As part of the April 2009 agreement, Seychelles agreed to seek comparable treatment from other creditors 18

19 Private sector debt: bonds With a Paris Club agreement in place, the Government stepped up its discussions with bondholders and commercial banks with a view to launching an exchange offer Under the exchange offer process, creditors are invited to tender existing instruments in exchange for new ones, carrying different payment terms Attaining a high participation rate was critical not only to our efforts to secure a sustainable debt service profile, but also to avoid prolonged exposure to litigation risk from hold-out creditors Collective action clauses (CACs) embedded in our bonds were key to this strategy In order to facilitate a deal with creditors, the Government approached the African Development Bank and negotiated an innovative partial guarantee which was eventually attached to the new bond issued as part of the restructuring 19

20 Private sector debt: bonds (cont) The partial guarantee from the AfDB protected a portion of interest flows due to creditors on the new bond, and was structured as a rolling, non-reinstatable facility The feature marked the first time that a multilateral agency has directly supported a sovereign bond restructuring in this way The endorsement helped reassure creditors about the direction of economic policy In February 2010 the Government closed an exchange offer that succeeded in applying a 50% debt cancellation to private sector claims with a a face value of $320 million The remaining principal is to be repaid over 16 years through a new Eurobond that carries a six-year grace period on principal and a step-up interest rate structure 20

21 Private sector debt: bonds (cont) High overall participation rates and the triggering of the Eurobond CAC enabled 100% of the eligible debt to be restructured, making the Seychelles debt exchange the the first modern sovereign bond restructuring to leave behind no residual holdout creditor problem despite the 75% NPV reduction SOVEREIGN EXTERNAL DEBT EXCHANGES BY PARTICIPATION AND NPV REDUCTION (1) Year Participation Reduction (NPV) SEYCHELLES % 75% Pakistan % 31% Belize % 13% Ecuador % 27% Dominican Republic % 1% Russia % 61% Uruguay % 13% Grenada % 45% Ukraine % 28% Argentina % 73% Dominica % 50% (1) NPV relief measured using market yields immediately before and after exchange. Source: IMF, Ministry of Finance 21

22 Private sector debt: banks Discussions with local and regionally-based commercial banks on the restructuring of $110 million of foreign currency-denominated loans proceeded bilaterally alongside those with bondholders and banks that eventually chose to participate in the exchange offer The Government s approach focused on maintaining comparability of treatment with the Paris Club deal and the commercial debt exchange whilst tailoring restructuring terms to fit the portfolios and needs of the banks Commercial banks agreed to extend repayment over prolonged periods (averaging 30 years), with long grace periods and low rates of interest The vast majority of commercial bank loans were converted into local currency to reduce pressure on the balance of payments and to ensure that a comparable level of debt relief was provided in NPV terms A limited number of small loans were bought back at steep discounts to face value 22

23 Non-Paris Club official bilateral debt Discussions with non-paris Club bilateral creditors proceeded in tandem at both the technical and political levels Discussions were at times complicated by a lack of familiarity with the debt relief process in the case of some creditors, and by the general absence of frameworks for providing significant concessions to middle-income countries Despite this, Seychelles has now concluded agreements with the majority of its non-paris Club official bilateral creditors Some of these creditors have preferred to refinance maturities by providing grants or other types of concessional financing Agreements have also included up-front write-offs (100% in some cases) and long term deferrals at low interest rates 23

24 Results: public debt transformation The restructuring cancelled $310 million (a third of GDP) in principal and accrued interest and cleared nearly $300 million of arrears The new external debt service profile that avoids spikes and which is in line with the country s payment capacity as forecast by the IMF In nominal terms, external debt service is projected to peak in 2018 before leveling out for the next seven years This peak remains highly manageable as a share of GDP at 2.5% PROJECTED EXTERNAL DEBT SERVICE (COLUMNS, $ MILLION LEFT AXIS) AND (LINE, AS % GDP RIGHT AXIS) 40 COLUMNS: $MN 8 $ Million LINE: AS % GDP % GDP

25 Results: public debt (cont) The average life of the debt was extended from 3 years to 14 years 90% of the debt is due in more than 10 years, up from 12% pre-restructuring Average interest rates were reduced to roughly 3% from 8% pre-restructuring EXTERNAL DEBT BY MATURITY PRE AND POST RESTRUCTURING 25

26 IV. Lessons

27 Lessons Expensive refinancings against a deteriorating macroeconomic backdrop can complicate an eventual debt restructuring exercise Markets are not always good at assessing the creditworthiness of sovereign borrowers and the risks entailed in large bond issues Fair burden sharing must be at the heart of any sovereign economic rehabilitation: Seychelles was posting the highest primary surpluses in the non-oil producing world as it was asking its creditors to make significant concessions Transparency, effective communication, and an observance of the principle of inter-creditor equity are critical to the integrity of the sovereign debt restructuring process, and can help deter creditor litigation 27

28 Lessons (cont) The Paris Club has evolved and has shown itself capable of adequately responding to the needs of heavily indebted countries focused on reforms, irrespective of their income status CACs work, and are an effective way of addressing the collective action problem that has marred previous sovereign debt restructuring exercises Direct multilateral support in the form of guarantees can play an important role in incentivising private sector creditor participation without placing pressure on future cash flows Non-Paris Club official bilateral creditors are finding new channels and practices for providing extensive debt relief to heavily indebted middle-income countries 28

29 Annex A IMF programme considerations

30 IMF program considerations By June 2008, reform involving full exchange rate liberalisation was the only way forward, but the Government had some big concerns about the design of the program: 1) How far would the exchange rate fall? In our optimistic scenario, we hoped the currency would reach only the black market rate of roughly 16 per $, or twice its then official rate. Even this would result in a drastic change in ordinary lives as nearly everything on the islands is imported Our concerns were made more acute by the mixed track records of countries adopting either shock therapy or a managed transition to a market exchange rate 2) How dramatic would the economic slowdown be in Seychelles? Although we had no idea of the coming severity of the global financial crisis, we knew the economy was likely to contract given the loss of purchasing power required to adjust externally, cuts in public, increases in taxes The magnitude of the forecast economic contraction affected our decision of how countercyclical fiscal policy should be. A balance had to be found between signaling the Government s reformist intentions on and ensuring that those hardest hit by the reforms had the resources to survive 30

31 IMF program considerations (cont) 3) How would the population respond to the phase-out of subsidies? We knew the IMF would require a phase-out of subsidies to state enterprises designed to limit price increases on fuels, foodstuffs and transport Coupled with the general inflation we expected to accompany the float, we were concerned the reform program would lose the support and ownership of the population which we viewed as critical 4) Given the limited amount the IMF could commit, who would fill the gaps? Even after comprehensive reform and the support of the IMF, we would have to rely on concessional funding from our bilateral and multilateral partners which had not yet been committed The IMF was prepared to provide $26 million for our SBA important funding, but not sufficient to close our financing gaps 5) Could relations with external creditors be normalised whilst placing our heavy debt burden on a sustainable footing? With debt of 160% of GDP and most of the stock in arrears, we knew we needed to take drastic measures, but we were concerned that we lacked the credibility to execute a collaborative solution 31

32 A comprehensive plan is agreed As the Government debated solutions to these concerns internally and with the IMF, the clouds over the global economy were darkening By October, it was clear that the global slowdown would be severe and that Seychelles would also be impacted The Government decided that the best course was for a drastic and comprehensive reform program that was heavily front-loaded, with two of the most difficult reforms carried out up front: Remove exchange rate restrictions and allow the currency to float Reduce the public sector workforce by 3,300, or approximately 17% These changes along with a restructuring of the public sector s external debt stock would serve as anchors for the program s fiscal and monetary targets 32

33 Detailed reforms Topic Description Timing Cabinet approval of 2011 Budget Strategy June 2010 Introduction of a new Auditor General s Act June 2010 Establish guidelines for government guarantees June 2010 Introduce standardized tender bidding document for all public procurement June 2010 Half-yearly budget review of expenditure by all government departments July 2010 Fiscal Policy Establish a comprehensive Government Assets Register August 2010 Adopt a new chart of accounts for the 2011 Budget November 2010 Determine budget treatment of all budget dependent agencies December 2010 Budget management training for departmental budget officers Jan Dec 2010 Revise Financial Instructions and Accounting Manual March 2011 Introduction of a new Public Finance Law September 2011 Modify accounting standards to follow International Accounting Standards September 2011 Set up an audit group to focus on large taxpayers July 2010 Taxes Submit a new Customs Management Act to National Assembly September 2010 Increase GST on tourism to 12% November 2010 Commission external financial audit of DBS and HFC June 2010 Engage FIRST Initiative on strategic options assessment of DBS and HFC July 2010 Public Engagement of IFC to advise on the government s options on Nouvobanq August 2010 Enterprises Implementation plan in response to strategic assessment of Air Seychelles October 2010 Commission a study of tariffs, production costs, and service quality in utilities 2010 Implement completed reform action plans for major public enterprises

34 Annex B Additional economic data

35 Key economic indicators (est.) 2011 (f) 2012 (f) Actual Actual Actual Proj. Est. Proj. Est. Proj. Nominal GDP ($ mn) 1, Real GDP Growth (%, annual change) Inflation (%, end of period annual change) Primary Fiscal Balance (% of GDP) Overall Fiscal Balance (% of GDP) Current Account Balance (% of GDP) Foreign Direct Investment (Inc loans, $ mn) Official Reserves (end of period, $ mn) Reserves / Imports (end of period, months) Exchange Rate (end of period, SCR/US$) Public Sector Debt (% of GDP)

36 Economic and fiscal charts Tourism and FDI, % Change, f Government Fiscal Balances, f Forecasts of Real GDP Growth, f % Annual change % GDP Tourism Earnings FDI (f) Current Account Balance, f f: -32.7% GDP : -40 GDP $ mn % GDP $mn (Left Axis) Months of Imports (Right Axis) Primary Balance Overall Balance (f) Gross Reserves (End of Period) Months of prospective imports % Annual change June 2010 December 2009 July 2009 Forecasts f Foreign Exchange, Jan-09 Jun-10 SCR / Euro SCR / USD SCR Rate (f) 0 Q3 '09 Q1 '10 Q3 '10 Q1 '11 Q3 '11 0 Jan-09 Jun-09 Dec-09 Jun

37 Pre-restructuring public debt (end-2008) EXTERNAL DEBT DOMESTIC DEBT Stock of which: Arrears Stock Multilateral 57 0 Bilateral Paris Club Other Bilateral Commercial Debt Commercial Loans Bonds and Notes (1) EXTERNAL TOTAL Central Bank Advances 8 Treasury Bills 104 Treasury Bonds 141 Government Stocks 9 Treasury Deposits 1 Commercial Loans 42 DOMESTIC TOTAL 304 Source: Ministry of Finance; Central Bank of Seychelles; IMF (1) Excludes disputed 30 million premium associated with Amortising Notes due