A Prime Minister Tries to Storm-Proof Her Island’s Finances

Ezra Fieser
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A Prime Minister Tries to Storm-Proof Her Island’s Finances

(Bloomberg Markets) -- Mia Mottley’s gravelly voice rang with urgency. Standing at the podium at the United Nations, the prime minister of Barbados was warning of the dangers her island faced as storms swollen by warmer oceans tore through the Caribbean. “This is a matter of life or death for us,” she said.

It was late September 2018 hurricane season and Barbados was flooding. A tropical storm threatened neighboring St. Lucia. On the other side of the globe, a typhoon took aim at Japan. The confluence of disasters was almost unthinkable. Almost. “This is not a science fiction movie,” Mottley said. “This is not a cartoon. And if I ever thought that it was a fantasy, what transpired in the last 24 hours across the different poles of the world has reminded me that it is not.”

Mottley had won office only four months earlier, becoming her nation’s first woman leader. This was her inaugural address to the UN, but she spoke with conviction, her words charged by decades of pent-up concern about a changing climate. She had seen for herself how flying fish, a once plentiful delicacy, were avoiding warming coastal waters, how rising seas were eating away at the wide white-sand beaches she’d known growing up, and how droughts were drying up aquifers that provide the islanders’ drinking water.

Financially shaky Barbados had escaped the wrath of disastrous hurricanes, but for how much longer? “We cannot plan our affairs or that of our people on the basis of luck,” she said. “It must be on the basis of policy and decisive action, but above all else on the basis of caring and empathy. I ask the world to pause, pause, and just get this one right.”

In front of her in the UN’s vast General Assembly hall, half the seats were empty. Some in the audience of dignitaries slumped in their seat. Others milled about. The signs were clear: Mottley was on her own. She returned to Barbados that day to work on a plan to protect the island, a plan of her own.

With wildfires ripping through Australia and the Amazon and along the U.S. West Coast, rising seas threatening small islands, and supercharged storms killing thousands and costing billions of dollars, markets and public officials are grappling with how to respond. There’s little that the prime minister of a country of some 290,000 people can do on her own to cool the world. But she can prepare her island nation for the inevitable crisis and its financial impact.

Now 54, Mottley has become a champion of what are known in sovereign debt contracts as natural-disaster clauses, measures that give the government a break from principal and interest payments in the event calamity strikes. Over the course of a year and a half of contentious negotiations to restructure Barbados’s sovereign debt, Mottley was finally able to persuade creditors to accept the clauses last October. She also needed to win the support of Bajans, as the people of Barbados are called, many of whom lost money when the government defaulted on its Treasury notes.

But in the process, Mottley says, Barbados has developed a model for how countries can protect their finances from climate change, especially neighboring Caribbean islands, which have been prone to default. “You’re not walking away from the liabilities, but you are walking away from the immediacy of the payments to create the cash flow that you need,” she says, seated at the head of a conference table at government headquarters in Bridgetown.

Under the deal the government and its creditors finalized in October, Barbados would get a two-year payment moratorium in the event of a disaster severe enough to trigger a payout from the Caribbean Catastrophe Risk Insurance Facility Segregated Portfolio Co., a risk pool that provides coverage for calamities. The Mottley clauses, which now cover about 80% of the country’s outstanding debt, would free up as much as $700 million to spend on rebuilding if weather events cause the government to enact them in the next five years. That’s equivalent to almost 15% of the economy that otherwise would go to debt payments. After the moratorium, payments would resume, including on accrued interest.

That sort of breathing space could preserve the ability of Barbados and other tiny nations to respond to ever-more-frequent disasters. Hurricanes have caused more than $212 billion in losses and damages in the Caribbean since 1980, according to the Center for Disaster Management and Risk Reduction Technology in Karlsruhe, Germany.

QuickTake Q&A: Who Pays Cost of Mother Nature's Destructive Fury?

The region is strewn with examples of the link between disaster and debt. The Bahamas, 1,400 miles northwest of Barbados, is borrowing as much as $300 million to deal with 2019’s Hurricane Dorian, the worst in its history. In 2017, Hurricane Maria crippled Puerto Rico’s ability to pay down the more than $70 billion in debt owed by the U.S. commonwealth at the time. Again and again, natural disasters have held back economic growth and, coupled with fiscal mismanagement, pushed countries into untenable situations.

Caribbean countries have restructured debt more than a dozen times in the past 20 years. “We live in such a bad neighborhood in terms of our vulnerabilities,” says Monica La Bennett, a vice president of the Bridgetown-based Caribbean Development Bank. “Governments, multilateral institutions, and the financial markets are recognizing that this is now a new normal, and so these clauses have become more important as part of the armory these countries can put in place.”

Mottley has lived under the specter of a natural catastrophe for all her life. At the decaying three-story concrete government headquarters in the capital, she recalls how two decades ago, when she was minister of education, she warned that a bad storm could set back the country, once one of the most prosperous in the eastern Caribbean because of a thriving tourism industry and its offshore banking businesses. “The gains of development you thought you had are immediately whittled away in hours,” she says.

The 166-square-mile pear-shaped island sits closer to South America than the U.S. That’s put it outside the main Atlantic hurricane belt, sparing it so many times that locals quip, “God is Bajan.” And it can look that way. Across from Mottley’s offices, sailboats bob in the clear waters of a horseshoe-shaped bay while cruise ships the size of office buildings dock in the distance.

But Barbados is small, flat, and vulnerable. Most of the population lives near the coast. Some Bajans live in rickety wooden homes known as chattel houses, their design dating to days when sugar plantations dominated the island and many residents were former slaves. “Nature—and what it brings with it—was our greatest threat,” Mottley says.

In conversation, Mottley, who earned a law degree from the London School of Economics and Political Science in 1986, switches fluidly from climate science to international finance to economic policy. She wears polygonal glasses that contrast with a round face, and an occasional smile reveals a gap between her front teeth.

Mottley’s immersion in Barbadian politics began early. Her grandfather was Bridgetown’s first mayor. Her father served as consul general in New York, where Mottley studied at the United Nations International School. She entered politics before turning 30, becoming one of the youngest education ministers in the country’s history. She rose to become leader of the then-minority Barbados Labour Party in 2013.

By 2017 she was already hatching a plan to turn the country around. The economy had stopped growing a decade or so earlier, infrastructure was in such disrepair that sewage leaked into the sea, and the country’s debt-to-gross domestic product ratio was surpassed only by Japan and Greece.

The economy of the former British colony depends massively on tourism, so when the financial crisis came along, it ravaged international travel. Growth contracted and didn’t return until 2015. The travel and tourism industry supports more than a third of the nation’s $5 billion GDP. In recent years, the number of foreign visitors has risen to more than 1.5 million annually. The coronavirus pandemic has hit the island hard. Tourists canceled thousands of hotel reservations in March, according to the Barbados Hotel & Tourism Association, even as cruise lines dropped voyages to the Caribbean, including Barbados, where some 800,000 passengers normally disembark each year.

The year before the 2018 election, as leader of the opposition, Mottley recruited a team of advisers that included Avinash Persaud, a native Barbadian, who’d spent years abroad as an investment banker at global heavyweights including State Street Corp. and JPMorgan Chase & Co., winning recognition for his work on risk modeling.

As Mottley’s team settled down to work, Persaud and the others couldn’t ignore what was going on around the region. The 2017 Atlantic hurricane season brought 10 of them, plus a handful of tropical storms that wreaked havoc in the U.S., the Caribbean, and Central America. Hurricanes Irma and Maria, Category 5 monsters, formed within days of each other, severely damaging Caribbean and Atlantic islands and the U.S. mainland. Irma destroyed tiny Barbuda. Maria left almost 3,000 dead in Puerto Rico. “It was just a horrific year,” Persaud says. “It led to a complete rethinking.’’

Mottley was already familiar with debt clauses that could afford protection against storms. The idea was actually born in neighboring Grenada, a tiny island whose major exports are nutmeg, mace, and newly minted doctors from its medical school. Hurricane Ivan hammered it in 2004, beginning a decade of economic malaise that resulted in a default a decade later.

During Grenada’s restructuring, financiers sought ways to cushion government indebtedness. A few ideas already existed, including so-called collective action clauses, which give a supermajority of bondholders power to make debt restructurings binding, as well as catastrophe bonds, mainly issued by insurance companies to protect against disasters.

Grenada’s adviser in the restructuring was White Oak Advisory in London. Managing director J. Sebastian Espinosa, an ex-managing director at investment bank Houlihan Lokey Inc., and his partner David Nagoski, a former U.S. Treasury official, have advised governments throughout Africa and Latin America. In Grenada’s case, they developed a clause that would specifically address the government’s fiscal condition after a hurricane.

“We wanted to come up with something that was conducive to bolstering resilience to rising climatic risks,” Espinosa says. “Adverse-weather clauses provide vulnerable sovereign debtors with a degree of flexibility by creating built-in buffers that can help them absorb some of the financial impact.”

Grenada’s restructuring culminated in 2015, and Mottley would build on that work. Having won office in a landslide in May 2018, she promptly announced the island would default on its debt of about $8 billion. She took the born-in-Grenada idea and expanded it, hiring White Oak for Barbados’s restructuring. The company drafted clauses that would include all types of natural disaster and cover almost all of Barbados’s obligations. Mottley sees the clause as a way to free up cash for rebuilding that would otherwise go to creditors. “If you have an event, you need fiscal space,” she says. “How do you best do that but by suspending your debt payments?”

To get the restructuring done, however, Barbados needed buy-in from skeptical creditors. Mottley also needed the support of her own citizenry, who in a restructuring risked losing money from their savings and from retirement plans.

In the end, Mottley was able to spread out the pain of austerity. She raised taxes on tourism, reasoning that visitors use infrastructure and services as much as residents, if not more. She also announced that foreign loans and bonds would be renegotiated, a surprise from a country that once boasted of its investment-grade credit rating and history of fiscal prudence.

Reaching an agreement with foreign holders of dollar-denominated bonds proved more contentious. Mottley tried to sell the natural-disaster clause as protection for lenders, because the government, without the clause, might default on its debts following a big storm.

Creditors didn’t buy it. Several institutional bondholders formed a committee, including Eaton Vance Corp., Greylock Capital Management, Teachers Advisors, and the Guyana Bank for Trade & Industry. The group wanted Barbados to consider an alternative approach, such as an insurance policy, says Rafael Molina, managing partner at Newstate Partners LLP, an advisory firm in London for the creditors. “I can understand the government of Barbados is concerned about hurricanes, because the threat of climate change is very real,” he says. “But from the beginning, creditors said they didn’t want this clause. There is no market for bonds with these clauses. It has to be driven by the market.”

Mottley took a hard-line approach. Negotiations dragged on and at times appeared stalled. Having secured a $290 million bailout package from the International Monetary Fund, she could afford to bide her time because Barbados didn’t necessarily need to borrow from capital markets.

In the end, fatigue set in, Molina says. Despite the creditors’ objection to the clause and to other government demands, they wanted to close the deal. “The thought was, Do we really want this to drag on for two years? We’ll just take it and move on,” he says.

The creditor committee accepted the government’s deal, with one caveat designed to make the bonds more salable: If natural disaster strikes, Barbados has to notify creditors of its intent to enact the clause. If a committee majority votes against its use, it can’t be enacted.

The wrangling over the Barbados deal exposed a weakness that may inhibit widespread use of Mottley clauses: The market hasn’t figured out how to price the risk in such cases. So far, though, investors seem welcoming. Similar bonds issued by Grenada were trading around par before the March credit sell-off. Buyers have actually pushed up the price for the new Barbados dollar bond, which matures in 2029 and carries a 6.5% coupon, since it started trading in December.

Just as Barbados built on Grenada’s experience, other countries may build on Mottley’s. As they consider ways to balance the needs of countries and creditors alike, the IMF and World Bank have held discussions on the clauses. In the Bahamas, where Hurricane Dorian caused $3.4 billion in losses and damages, the government has considered a similar provision in new debt sales.

For now, the clauses are “experimental,” says Michael Papaioannou, a visiting scholar at Drexel University in Philadelphia and an expert on emerging-market debt. They could become common if multilaterals such as the World Bank and IMF include them in loan contracts. “We are seeing the first steps,” he says.

Barbados is determined to keep taking them. Although wide-scale acceptance of the clauses “will take a while,” Persaud says, Barbados plans to include the clause in all future debt sales, blazing a path for other governments. “It does require a few pioneers,” he says. “Financiers love to let someone else be first. They get paid a lot of money, but they’re risk-averse.”

On a January afternoon in Bridgetown, Mottley gathers her cabinet together to go over the numbers for the coming budget year. She whips out an iPad to check spreadsheets that show debt has declined to 114% of GDP from about 176% when she took office. She points to a part of the spreadsheet that shows how much the country will save if it has to enact the hurricane clause—a bit of certainty amid the wild unpredictability of climate change.

Outside, a steady, light rain is falling. It’s a welcome respite from a punishing dry spell. But even this relatively small amount of precipitation is inundating streets that have never flooded before. “Even without hurricanes you have normal floods,” she tells the room. She mentions that it’s been six decades since a catastrophic hurricane struck the island. She turns to a wooden tabletop and raps it with her knuckles. “Barbados has been luckier than most.”

Fieser is a credit market reporter based in Bogotá.

 

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