NIF 101: Gov’t mis-informs nation on NIF Bonds; Please tell Stuart Young Bonds are a form of Borrowing

The man on the street is left in the dark by a Minister of Communications who does not even know that a bond is a form of borrowing. Government’s resulting misdescription of the NIF Bonds is best encapsulated by Stuart Young’s lack of understanding.

Stuart Young’s blunder on CNC3 this week started when he called the assets Blueclass versus Bluechip.

The National Investment Fund does not provide for T&T rather it provides for future borrowing of the Minister of Finance to indiscriminately borrow against future dividend payments from the underlying assets. What is clear is that the government is running a primary fiscal deficit; with total Public Sector debt above $100 billion.

The NIF Scheme is a poorly planned regime that would result in future governments being straddled with using taxpayers funds to service debts incurred today.

Facts on the NIF:

Government borrowing $4 billion dollars to pay recurrent expenditure.

Stuart Young said that it is incorrect to state that the government is borrowing. This shows that the Communications Minister is either totally ignorant or is outright lying. In Stuart Young’s defense he knows nothing about finance in general nor public finance. But to his discredit as a Communications Minister it would be prudent to check your facts with finance experts. However, as Communications Minister he is challenged in that even the Finance Minister is completely incompetent regarding his portfolio.

Assets valued at $7.9 billion today will go to the NIF to be held by bondholders for $4 billion.

Stuart Young compounded his disingenuity by using the analogy of a homeowner renting his house for income.

Stuart Young again showed his lack of understanding regarding finance by stating that the NIF bond does not affect government’s debt to GDP ratio. Where Central Bank domestic reporting is concerned they may choose not to include the $4 billion in government debt. However, our international watchers (such as the sovereign risk rating agencies and international lenders such as the IMF) take all debt, all contingent liabilities into account. Therefore, this $4 billion borrowing will be treated as national debt where it matters; meaning the ratings agencies and international lenders.

The Minister of Finance also showed gross incompetence when he said that the bonds will not be explicitly backed by the government but implicitly backed. Then who is this government fooling if you say that a government backing in implied but not for the purposes of calculating national debt. This is the sole mechanism by which the Rowley-led PNM wishes that the $4 billion will not be classed as government debt.

Additional Bond Issues without adding more assets under management usually result in lower bond values and bondholders can lose on their investment if they plan to liquidate before maturity. This is because prior to maturity bondholders would be selling their bonds on the secondary market. Therefore, if the government dilutes the value of the bond by issuing fresh bonds before existing tranches mature the bondholders may find that their tradeable value is less than the face value. Only if they choose to hold to maturity they can sell to the government at the face value of $1000 per bond. However, if bondholders choose to sell before maturity they may get the bond sold for less than $1000. For instance, they may realise a price of $800 and the interest generated of $180 over four years ($45 per year in coupon “interest” payments, on the 5 year bond) when added to the sale price would mean the bond holders lose $20 nominally. Another issue to consider is with the time value concept of money the real loss would be greater.

NIF in a nutshell:

· Government is borrowing to spend today.
· NIF Fund Managers can issue more bonds.
· Minister of Communication Stuart Young either lied or does not understand that bonds are forms of borrowing.
· Public Sector Debt will increase in the eyes of our sovereign risk rating agencies and the international lenders.
· Additional Bond Issues without adding more assets under management usually result in losses for bondholders if sold before maturity on the secondary market.
· The public will not be owners of the companies which is a core tenet of a shareholding democracy.
· The prospectus affords for government to borrow to repay bonds on maturity. If this mechanism becomes a characteristic of the NIF it will in effect represent a Ponzi Scheme.

In the end the public should be aware of this risk and the one way to mitigate against the potential decline in value is to stipulate a ceiling on the ratio of bonds issued to equity under management. This way one area of negative speculation can be eliminate; that is the liquidation of bond values. Bond values could also be liquidated if the underlying assets decline in value. This however, could be monitored and could be mitigated against by government purchasing marginal shares in the same companies to bolster market value.

This is the level of knowledge exchange in which the government should be engaged. However, we are where we are because T&T has a Minister of Finance who knows not his portfolio and a Communications Minister in Stuart Young who does not understand that a bond is debt.

Taharqa Obika
Senator, Parliament of Trinidad and Tobago