CIG buys bonds with loan to manage interest rates

Finance Minister Chris Saunders (file photo)

(CNS): Finance Minister Chris Saunders has announced the Cayman Islands government’s decision to withdraw all of the remaining loan guaranteed by the previous administration to invest in US bonds to manage CIG borrowing for projects capital assets over the life of this budget. Saunders said that with the 3.25% fixed interest rate about to expire on the government’s $393 million line of credit and the expected increase in interest rates over the next six month, he made the decision to take all the money.

In a statement on Thursday, Saunders said the move would allow the government to fund its capital projects over the next two years and avoid paying interest rates of up to 6.75% by the end of the day. of this year.

In the face of expected financial constraints during the pandemic, the previous administration set up a US$403 million line of credit in December 2020 with a consortium of local banks. However, despite the challenges, the government’s finances remained relatively stable, so the money was not needed except for a $10 million drawdown to keep the line of credit active. As a result, neither the previous administration nor the current administration has used the money so far.

Saunders said a decision was made to take the loan and simultaneously invest the proceeds in two-year U.S. Treasury bills to reduce interest charges on the loan that was approved to fund the projects. of fixed assets to come until 2023.

“Using the existing local loan facility allows the government to borrow at a fixed rate of 3.25% per annum for a term of 15 years,” Saunders said. “The prime rate in the Cayman Islands is currently at 4% and is expected to rise through the remainder of 2022, following widely anticipated rate hikes from the US Federal Reserve. Such increases would expose the government to higher interest rates in the future than the current fixed rate of 3.25% offered by the consortium. Drawing down the loan funds now will allow us to avoid being negatively affected by the next scheduled interest rate hikes.

With time running out for the loan, the Cabinet decided on June 7 to withdraw the money before the favorable fixed interest rate agreement expires on June 18.

The US Federal Reserve is expected to meet over the next five months to direct further interest rate hikes following yesterday’s 0.75% hike. “These interest rate hikes could result in the government facing a borrowing rate of up to 6.75% per annum,” the minister said, stressing the urgency of using the existing loan facility.

“The existing US$403 million long-term facility offered by the local consortium at 3.25% per annum is cheaper than the existing prime rate of 4% and is certainly better than any potential future offer the government may obtain. attempting to negotiate a new arrangement in the current volatile interest rate environment,” Saunders said.

He noted that no penalty is imposed if the government prepays the loan. “Earlier than scheduled repayment of the facility is a way to reduce the interest charges the government would otherwise face and it currently has parliamentary approval to borrow nearly C$350 million in 2022 and 2023 to its capital projects, such as the mental health facility, schools and waste-to-energy plant.

Saunders said the drawdown from the loan funds would not be used to fund the government’s day-to-day operating expenses, only infrastructure projects. Operating expenses are covered by revenue, he noted. With the money in bonds until needed, the CIG will save on borrowing costs since the money will earn nearly as much as the interest paid on the loan.

“As of June 16, a 2-year U.S. government treasury bill had a yield of approximately 3.2%, which will significantly reduce the government’s cost of holding the loan funds drawn.”

He said four local banks had expressed interest in acting as brokers on behalf of the government for the purchase of the US Treasuries, and that CIBC FirstCaribbean International Bank was the successful entity.

“In our efforts to provide stable, effective and accountable government, this is the most prudent and responsible course of action to take with respect to borrowing under current market conditions,” Saunders said. “With an interest rate cap of 3.25% over 15 years and by investing borrowed funds until they are needed, we can lower the cost of borrowing while financing the capital projects needed to expand the infrastructure of our islands. This is a clear victory for the Cayman Islands in a period of global volatility and maintains the continued stability of our public finances.

He said the government would not take on any additional borrowing for the remainder of this term and that as of May 31, the public debt stood at C$206.4 million. The levy will bring the balance to C$535.5 million, making a debt-to-GDP ratio of around 9.9% one of the lowest in the world.

“This increase in cash on hand will strengthen the country’s ability to respond to any emergencies that may arise during these difficult times,” he said. “The government has considered this decision very carefully and has concluded that it is in the interest of the islands that the loan funds are drawn down now in June 2022 ahead of a rapidly rising interest rate environment expected in the near term.”

If the government were to negotiate a new facility in the future, he said, there was no doubt that it would be more costly for the country.


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