Emerging-market bonds: Fiji pulls off a coup with $200m offering

Emerging-market bonds: Fiji pulls off a coup with 0m offering

AUCKLAND, NEW ZEALAND — While many emerging economies are being battered by volatility in the world’s capital markets, the Pacific island nation of Fiji managed to refinance its U.S. dollar-denominated sovereign debt in September at an interest rate about a quarter lower than it was previously paying.

     Taking advantage of the dying months of record low interest rates in the U.S., Fiji’s $200 million global bond offering carried a coupon of 6.625%, down from a 9% rate on a $250 million bond sold in 2011, a reduction that suggests improving international confidence in the country’s economy and its political situation.

     The Reserve Bank of Fiji, the central bank, on Sept. 26 raised its estimate for economic growth this year to a record 6%, putting the country on course to achieve an annual increase in gross domestic product of more than 4% for three consecutive years. If achieved, this would be the first such period since the early 1970s.

     The Asian Development Bank is not quite as optimistic — in an economic update released in September, the Manila-based lender stuck to its forecast of 4% GDP growth for this year, although it raised its 2016 estimate to 4.5% from 4%, citing a pickup in infrastructure spending and more private investment.

     Fiji, which is re-emerging as a democracy following a military coup in 2006, made its opportunistic dive into the bond markets just four months after Standard & Poor’s, an international credit rating agency, raised the country’s long-term foreign-currency rating by one notch to B+.

     That leaves Fiji’s bonds in junk territory, and S&P warned that the country has weak institutions, a lack of monetary flexibility due to its pegged exchange rate to the U.S. dollar, and an underdeveloped financial system. Even so, it said a better outlook for economic growth, a smooth transition to democratic rule after elections in September 2014 and a program of reforms had generated a “more conducive economic environment” and led to “re-engagement” with donors and multilateral lenders. The ADB has pledged to invest $350 million in the country from 2014-2018.

     S&P said it might raise its rating if Fiji’s fiscal deficits average less than 2% of GDP over a sustained period and the ratio of net debt to GDP continues to fall. However, Moody’s, another ratings agency, has had a B1 speculative-grade rating on Fiji’s government bonds since 2009, when it cut the grade one notch from Ba2.

     Fiji is not the only risky economy still looking to the bond markets to raise funds. Pakistan in September issued a $500 million 10-year bond in the Eurobond market, Iraq is hoping to raise up to $2 billion through its first bond sale in nearly a decade and Ghana is trying to raise as much as $1 billion.

     London based sovereign wealth consultant, Nicholas Spiro, director of Spiro Sovereign Strategy, said bond markets have weathered the sell-off in emerging market instruments better than the currency and equity markets, which have so far borne the brunt of a deterioration in investor sentiment.

     “Bond markets are still faring relatively well,” he said. “While vulnerable emerging-market and frontier-market economies are being forced to pay up, some of the riskiest economies, such as Ghana and Albania, are planning dollar bond sales.”

     In a low-interest environment, 6% offers a good return for investors with an appetite for risk. “The ideal portfolio is one which has a broad credit profile of countries” said Parish Narayan, a professor at the Deakin University Business School in Melbourne, Australia.

     “Obviously investing in high credit profile countries means lower returns and vice versa. Fiji’s credit profile is nicely balanced from a risk-taking investor’s point of view, so it’s an ideal country as part of a portfolio investment.”

Too risky for some

The coupon was not high enough for some international funds, however. In New Zealand, a director of a leading asset manager said that Moody’s rating implied a 20% chance of default. There was no liquid secondary market for Fiji bonds and there was also an exchange-rate risk, said the director, who did not want to be named.

     “Investors should be looking to be paid a premium to compensate for these risks,” he said, adding that his company had not bought the bonds.

     Known as a sugar producer and a tourist destination with sandy-white beaches, Fiji’s natural beauty belies a turbulent political history. The remote archipelago of 903,000 people, which lies about three hours north of Auckland by plane, has witnessed four coups since independence in 1970. The latest was in 2006, when military chief Voreqe (Frank) Bainimarama, who is now prime minister, took power.

     Fiji’s first international bond offering took place just before the 2006 coup and raised $150m with a coupon of 6.875%. The debt was rolled over in 2011 with a $250 million bond maturing in March 2016. That was paid off in September with $50 million from a government sinking fund and $200 million raised from the new debt issue.

     In keeping with the government’s lack of transparency, Fiji has yet to announce who bought the bonds. But International Monetary Fund data show that large emerging-market bond funds and the state-controlled Fiji National Provident Fund, the country’s largest financial institution and monopoly pension fund, were holders of earlier debt issues.

     The latest refinancing will save Fiji some $46 million in interest payments over the next five years , according to Finance Minister and Deputy Prime Minister Aiyaz Sayed-Khaiyum. He said the saving was generated by the lower interest rate and the discharge of $50 million on the earlier bond. That should go some way toward easing the country’s debt burden, which S&P estimated in May was 44% of GDP in 2014.

     The government’s international debt has come in for criticism from academics and the opposition. Biman Prasad, leader of the opposition National Federation Party and a university economist, warned in parliament on Aug. 27 that the country needed to reduce its external debt. He said that issuing U.S. dollar-denominated bonds was a “risky proposition” because of the possibility of currency fluctuations and the weakness of the Fiji dollar.

     “I know the economy has grown over the last two or three years but a lot of that growth is indeed from borrowing,” he said.

     Wadan Narsey, a former politician who is a well-known critic of the government said in an August post on his blog that the country’s recent strong economic growth was attributable to debt-funded increases in government spending on infrastructure.

     Narsey also compared coup-prone Fiji with Mauritius, another small island nation, which he noted has no standing army and has never had a coup. “Between 1976 and 2014, Fiji’s GDP has merely doubled, while Mauritius has increased five times,” he said.

Emerging-market bonds: Fiji pulls off a coup with 0m offering