$10b debt liability – A precarious financial position
19 September, 2020, 6:23 pm
Many people know that the national debt is fast approaching $8 billion. But do you know that the debt liability of this Government is already over $10 billion?
Our GDP is about $9 billion. This means that we are wallowing in debt.
What do I mean by debt liability?
Debt liability includes the government debt plus the debt of government owned companies that are guaranteed by Government.
Why should we add the guarantees to the government debt?
We must do so because the Government will be required to pay the debt if the company is unable to pay.
These guarantees are called contingent liabilities of Government.
But they can easily become real liabilities when the company cannot pay.
The fast rise in the total debt liability is due to two reasons.
First, there is a $2billion increase in government debt this year alone.
Second, the government guarantee is also increasing by $500 million this year.
Why is this debt liability important?
When a government company wishes to borrow, the lender sometimes is not fully comfortable with the ability of the company to repay the loan. Therefore, the lender will demand a guarantee.
Without the guarantee, the lender will not lend money to the company.
A good example is the recent decision by the Asian Development Bank (ADB) to lend money to Fiji Airways.
The Minister for the Economy claimed that this was the first time that a multilateral institution like the ADB had lent money to an airline.
This claim was misleading.
The ADB was not satisfied in the ability of the Fiji Airways to repay the loan.
The ADB insisted that government guarantee the loan.
The ADB would not have lent money to Fiji Airways without a government guarantee.
Over $1 billion in guarantee
As of August 2020, Government had granted loan guarantees of $1,114 million to the following companies:
– Fiji Airways $440.0m;
– Fiji Development Bank (FDB) $302.0m;
– Fiji Sugar Corporation Ltd (FSC) $218.5m;
– Housing Authority (HA) $90.2m;
– Energy Fiji Ltd (EFL) $51.1m;
– Fiji Broadcasting Corporation Ltd (FBCL) $8.8;
– Pacific Fishing Company Ltd (PAFCO) $1.8m; and
– Fiji Hardwood Corporation Ltd (FHCL) $1.7m.
There is more to the above list. The Government also guarantees the members’ funds at the Fiji National Provident Fund (FNPF).
This stands at $6 billion.
If you add this to the above list, the total government guarantee jumps to a hefty $7 billion.
While this guarantee is offset by the holding of government debt by FNPF, it is nevertheless a liability that needs to be acknowledged.
The Government gave a similar guarantee to the depositors in the National Bank of Fiji.
There are developments at the FNPF that must concern us all.
The Minister for the Economy has permitted FNPF to lend to Fiji Airways, allowed members to withdraw because of the crisis, and reduced the contribution from both employers and employees.
The FNPF has also invested heavily in FSC and the tourism sector.
While I believe that the FNPF is still financially strong, these factors are bound to materially affect its financial position.
But what worries me the most is the political interference in the policies of the Fund, the lack of independence of some members of the board and the apparent omission to apply the “fit and proper” standards to some Board members by the regulator which is the Reserve Bank of Fiji.
In this crisis, the risk of government companies defaulting on their loans is multiplied many times over.
The impact of this virus around the globe is scary.
Infections have reached 29 million.
Deaths will top 1 million soon.
The enthusiasm about travel bubbles has disappeared.
Reality has set in that the crisis will be much longer than was originally thought.
I have been telling Government this reality since the crisis started.
Therefore, the financial position of Fiji Airways remains a concern.
In the recent sitting of Parliament, the Minister for the Economy lamented that other countries have bailed out their airlines without political fanfares.
Yes, I agree.
But there are two very important conditions that these countries have which we do not enjoy.
The first is that their Governments and their airlines were transparent and proactive.
We are certainly not.
The lease and financing agreements that we have been told were nooses around our necks, have not been released at least confidentially to a bipartisan committee.
What is the fear?
Perhaps, it will reveal the truth.
At the same time, Fiji Airways and Government have been way too optimistic which has prevented them from taking proactive actions with costly consequences.
I was not surprised by the level and the outcome of the debate on Fiji Airways in the recent Parliament session.
The shareholder minister who, in my view, not only built the time bomb at our national airline, but also lit the fuse, stood his ground.
He refused to allow a Parliament Committee to find solutions for the airline.
The second is that the Governments of these other countries are not in a financial distress as Fiji is.
The minister misses the most important point here.
In my assessment, we are in this big financial mess because of the minister’s poor economic and financial management.
The indicators of these are not disputable, and I will reveal them for everyone to see.
The people must therefore be concerned because the cash flow crisis at Fiji Airways will drag the entire country down with it.
Rising default risk
We know that some of the companies in the list have not performed well even in normal times.
The ability of these companies to keep up their debt repayments is severely eroded as this crisis drags on into next year.
It is therefore very important that we track these total debt liabilities much closer than in normal times.
If you think that government companies do not default on their loans, please think again.
One of them defaulted very recently. The FSC earlier this year could not pay its loans from the FNPF.
When the FNPF called on the government guarantee, Government hurriedly made a deal, the contents of which we do not know.
Nepotism and conflict of interest
Government has guaranteed close to $9 million of the debt of the Fiji Broadcasting Corporation (FBC).
We all know that the older brother of the line minister is the CEO of the FBC. Family links add a very dangerous dimension to financial relationships.
There will always be a strong perception of the absence of objectivity when family members negotiate across the breakfast table.
The appearance of nepotism should never be condoned even if the person is the best qualified of all applicants.
If nepotism is not bad enough, what about the borrower chairing the Board of the lender?
Through the directive from the shareholder minister, the Fiji Development Bank (FDB) lent over $70 million to the Fiji Airways with a government guarantee.
The minister then appointed the CEO of the Fiji Airways to chair the board of the FDB.
While this is a grave insult to local talents, it is not a smart thing to do if we are concerned about the performance of the FDB.
The Government is caught in its own dangerous web of being the majority shareholder of both entities, a financier to one and a guarantor to the other.
This incestuous relationship heavily compromises the governance integrity of FDB and Fiji Airways.
In my assessment, Government will fall way short of its budgeted revenue for this financial year.
That means it will borrow more than $2 billion this year. It will need to borrow the same in the next financial year.
Meanwhile, its incentive package on getting tourism back is impotent because of the continuing health crisis.
That means that the expected recovery of the economy next year predicted by the Reserve Bank of over 12 per cent will not happen.
Meanwhile, as the crisis rolls on to late next year as many have predicted, Fiji Airways, in my view, will come back to Government for more help to the tune of $500 million.
In my assessment based on experience, Government continues to turn a bad situation into a precarious one by its poor financial and governance decisions.
Where will all these end up at? You guessed it, a debt liability excluding FNPF guarantee of over $15 billion or close to 170 per cent of GDP.
If Government was an enterprise, it would have been declared insolvent by now.
* Savenaca Narube is the leader of the Unity Fiji Party. He is a former Governor of the Reserve Bank of Fiji and permanent secretary for Finance. The views and opinions expressed are those of the author and not necessarily of this newspaper.
30 THE FIJI TIMES —SATURDAY, SEPTEMBER 19, 2020