Up next, housing bonds

Fresh off the success of the National Investment Fund, Government is considering a new bond offer — this time aimed at stimulating the housing sector — to help satisfy what it considers an obvious appetite for investment in TT.

In a surprise announcement on a political platform in Malabar on Saturday, Finance Minister Colm Imbert said these bonds are a “special type of bond” intended to raise capital for Housing Development Corporation (HDC) projects.

The NIF offer “wildly exceeded” Government’s expectation, more than raising the $4 billion the state had set out to earn. The offer was oversubscribed by 82 per cent, with the value of all bids totalling $7.3 billion. This $3 billion surplus, then, suggested to Government that country was “crying out for investment,” Imbert said. “We have decided to tap into that spare capacity with housing bonds.”

Economist Marla Dukharan, who had been critical of the NIF, was not thrilled with this new announcement. “I am surprised and disappointed that on the heels of a $4 billion debt issue, and before the Government tells us what the current year’s fiscal deficit is relative to the budget, and before the next year’s fiscal deficit is even announced, the Government is already planning to issue more debt, notably in the absence of a deficit target or any plan to reduce the deficit,” she said.

This is borrowing in a vacuum, and grossly fiscally irresponsible, she added.

“The Government should have a medium-term fiscal framework in place, which seeks to balance the budget and thereby eliminate the need to borrow. Instead, the Government appears to want to capitalise on the market’s apparent willingness to finance the Government’s deficit, because it can, and not because it needs to,” she said.

The logistics haven’t been worked out yet, but Imbert proposed an initial $1.5 billion in housing bonds that will have a government guarantee. After that, the bonds will be guaranteed by mortgage payments for the houses. People who invested in the bonds will also have a special window into the acquisition of HDC houses.

“With this $1.5 billion in housing bonds, we can get HDC projects going, pay contractors, and accelerate housing construction. We will be giving the HDC the money it needs and young people — young families — the opportunity to save money, get good interest rates and also be HDC homeowners,” Imbert said.

But can the country sustain more debt? One of the attractions of the NIF was that even though it was implicitly guaranteed by Government, payments on the bonds are facilitated through the dividend earnings of its assets — among them, over $4 billion worth of Republic Financial Holdings Ltd shares. The total value of assets in the NIF — $7.9 billion — is also double the value of the bond offer.

These bonds will have an explicit government guarantee and once the houses whose construction they have funded are sold, will be financed by the mortgage loan payments.

Mortgage-backed securities are also notoriously associated with the cause of the Great Recession in the late 2000s (December 2007 – June 2009). A mortgage-backed security is one that is secured by a mortgage or collection of mortgages. One of the causes of the Great Recession happened when homeowners, particularly those who were considered high-risk, defaulted on their mortgages after the US housing market “bubble” burst, causing a massive relative drop in housing prices.

Asked about the risk associated with mortgage-backed securities at a recent press conference at the Ministry of Finance, Imbert clarified that the bonds would not be mortgage-backed per se, but rather, the cash from the loan used to buy the house.

“(It’s from) the sale of the houses that are constructed using the cash from these bonds. That cash will go into a sinking fund used to repay the bonds, so it’s not mortgage-backed securities per se. It’s not the mortgages themselves; it’s the cash that will be paid for the purchase of the houses that will be going into the sinking fund,” he said.

Cause of Debt

But can Government handle more pressure to its current debt profile? Imbert believes yes.

“Yes we can. This is the kind of thing credit rating agencies and international agencies approve of because this is not — we’re not throwing money away — we are encouraging savings and home-ownership, which is a priority of any country. So, once you focus your borrowing on productive capital expenditure that’s a positive as far as rating agencies are concerned. So we do have the flexibility to guarantee these bonds and they will be used for a productive purpose,” he said.

Dukharan is sceptical. TT’s public sector debt in March 2018 was $120 billion, she told Business Day via email, as high as 80 per cent of GDP, depending on which figure is used. To her, this level of debt is unsustainable on a couple levels: First, TT has been running a primary fiscal deficit since 2014. “This means we are borrowing to pay the interest on existing debt, let alone the principal,” she said.

Second, the International Monetary Fund considers the debt sustainability threshold to 55 to 56 per cent debt to GDP.

“Beyond that, each additional dollar of debt has a negative impact on GDP — in other words, the more you borrow, the more your economy will shrink. And a shrinking economy only means that debt becomes even more unsustainable. This is why debt should be limited to financing activities that increase the productive capacity of the nation, in other words, investment, so that you grow the economy and therefore create the means to repay the debt. We are borrowing to finance what is almost completely recurrent expenditure — it adds nothing to the nation’s ability to grow, its ability to produce, its ability to improve lives. We are digging ourselves into a hole, fast,” Dukharan said.

Dukharan admitted that the details on this new bond were still vague and so was reluctant to comment on specifics. But, she said, if the country must, it should be limited to facilitating projects and initiatives that improve a country’s productive capacity.

In the case of housing, she said, one can argue that this is an essential component of a healthy and productive society, but to what extent should the state be involved in this type of activity? There are already several fiscal incentives to stimulate the private sector to construct houses, as well as for lower-income people who want a mortgage, she said, so if they haven’t produced the desired results, the question now needs to be why?

“My point is, the provision of housing is not an activity that the Government should engage in, in the first place, and if they choose to do so, they should not borrow to engage in this type of activity, for future generations to repay. This to me makes no sense,” she said.