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#518430 - 10/21/16 10:04 AM GOB Urged To Lower Rates on T-Notes & Bills
Marty Offline
With the Belize economy in recession, and US currency as scarce as a ham leg on Christmas Eve, the chamber of commerce today looked to financial advisor Ervin Perez for advice. He holds quarterly sessions with private sector stakeholders and today the subject was government's financing of domestic debt with treasury bills and notes. Now, to the layperson that may sound about as exciting as watching grass grow, but Perez says it could translate into lower interest rates on lending from commercial banks, and lower interest expense for taxpayers:...

Ervin Perez, Managing Director - Lagacy Fund
"It's important for us especially in this current economic time that government's financing of debt is the more efficient. This also translates to the private sector because government debt and the cost of government paste is kind of like the bench mark on what private sector has to pay. Simply put, the private sector always have to pay a risk premium over government debt rate. So if government pays 5% on some treasury note, private sector will normally have to pay 5 plus a premium of 3-4% more on a same instrument of a same maturity."

Daniel Ortiz, 7News
"Is the government right on target on their recommended amounts of treasury notes and treasury bills it has issued or currently issued? Or is there any dangers in your mind that we should be aware of?"

Ervin Perez, Managing Director - Lagacy Fund
"Well I would say that the government has been very conservative as how they should be but I think there is more room and more need for a greater allocation of domestic security. So right now the maximum T bill and treasury notes is about 850 million dollars. I think to steer our economy out of this mild recession and to stimulate economic growth and all the things that needs to be done, we have to have that ceiling go to about 2 billion dollars' worth of both T bills and T notes that can be issued by the government. So we're talking about 3x where we are."

Reporter
"How receptive has the government been in considering what you have been saying regarding the interest rate on the T bills and the T notes?"

Ervin Perez, Managing Director - Lagacy Fund
"Well we have seen that the treasury notes, the rates have fallen so there has been significant savings. Previously before the lobbying effort started, you had interest expense upwards of 24 million dollars a year. That's down now to about 19 million dollars so you're talking about 5 or 6 million dollars in savings. so interest rate on the treasury notes have fallen about 3 percent to 2 percent but what we are saying is that those risks need to go much lower than they are right now to stimulate economic growth and you are talking another 2 or 3 percent on the treasury notes. that also translates to allow private sector to borrow more and that has to take place because as we say in this current point in time, government is being conservative and is slowing down on public spending so that has to be replaced by private sector making the investment."

Perez estimates that government could save 13 to 15 million dollars a year less in interest expense if it would put its treasury notes out to auction.

Channel 7


GOB domestic debt financing costs could be $13.5 Million less!

The Government of Belize could save $13.5 Million in interest costs per year and stimulate the economy by reducing commercial banks’ interest rates, which would encourage private sector investment in new businesses suggests Ervin Perez, Managing Director of the Legacy Fund Limited. Perez presented his ideas at a business luncheon for the Belize Chamber of Commerce and Industry at the Best Western Biltmore Plaza Hotel on Thursday, October 20.

He argued that GOB currently pays out $19.1 Million in financing costs on the $450 million worth of Treasury Notes,which the Central Bank of Belizeoffered for sale to investors at 3 per cent annual rate of return. He pointed out that in comparison the Treasury Bills which mature in 91 days and are sold by auction bid, averaged an interest cost of 0.03345 percent or 3 cents per year for a $100 investment. In comparison, every $100 invested in Treasury Notes which mature in one year yields $3.00. In effect GOB is paying $2.73 more for every $100 it borrows by Treasury Notes than each $100 borrowed by Treasury Bills. The difference is that Government has the use of money borrowed by Treasury Notes for one year, while government must be ready to pay back the money borrowed by Treasury Bills in 91 days.

Perez proposed that the annual interest on Treasury Notes would be much less, perhaps 50 cents on $100, if instead GOB allowed the interest rate to be determined by the buyers bidding at an auction of the Treasury Notes. This would result ina $13.5 Million saving for Government, and Perez kept it real by pointing out that the working people of Belize – the taxpayers are the Government, because it is their taxes which is paying this interest!

He said this minimum 3 percent annual interest that investors could earn from a Treasury Note, was in effect keeping commercial interest rates artificially high, in effect the 3 percent is the floor for interest rates at the moment. If GOB could reduce its financing costs to 50 cents per $100, or 0.05 percent; it would force commercial banks to lower their interest rates. This in turn would encourage investors to invest in business ventures that at the moment do not seem very profitable, because the interest on repayment of a loan would eat up most of the profits. Business ventures that are presently being shelved because the financing cost are too high would suddenly become more viable if the interest rates were 2.5 per cent lower.

Banks’ prime lending rate presently hovers around 13.5 per cent per annum, but a business venture would become much more feasible if the financing were reduced to 11.5 per cent. The most attractive rate banks offer is 7 per cent per annum, but such a loan must be secure by a cash deposit for the same amount. Why would you want to borrow $10,000 if you already own $10,000 deposited in the bank!?!

Perez comes with impressive credentials as he was a senior mangger at Scotiabank and left the bank seven years ago to establish the Legacy Fund Limited, which helped create the financial instruments for the Belize City Council’s $20 Million bond issue, to finance the cement paving of the city streets.

The Reporter


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#518582 - 10/29/16 10:34 AM Re: GOB Urged To Lower Rates on T-Notes & Bills [Re: Marty]
Marty Offline

Lowering Interest on GOB Paper Won’t Drive Down Rates

We asked Financial Secretary, Joseph Waight about the idea from financial advisor, Ervin Perez, to lessen the taxpayer's burden on domestic debt.

The Managing Director of Legacy Fund thinks that if the Government lowers the rates on the Treasury Notes and Treasury Bills - it will also drive down interest rates - while making public debt cheaper. But the Financial Secretary isn't so sure that the Banks will want to by in. He told us that it's all about demand, and if the banks profit margins are decreased, they will not want to buy in on the Government's Treasury Bills:

Joseph Waight, Financial Secretary
"Whether the government can borrow cheaper it depends on the market, it depends on the demand. We don't have many takers at 7%. People don't want to tie up their money for that long even at those attractive interest rates. They would prefer shorter term maturity, because a bank would not want to tie up its money for that period of time and private investors don't have the kind of money that the government is borrowing. The government had borrowed 200 million dollars the other day. So mostly it's the banks that are in the game."

"Whether those rates can go down a bit, well we price at what they call a yield curve. That is the maturity is one year, two year, five year, ten year - interest rates around 3%, 3.5%, 7% - those are coming down historically. But we can have to do it gradually and the problem is if we were to offer let say a 1 year bond at 2%, I am not sure there will be any takers. We can try it, but I don't think so. The demands is it's a limited market. Only a few people have that kind of money to go in the system. I am not sure. Mr. Perez, it's something that we can consider, but I am not sure that's it's as easy as they make it out to be and we don't think that there will be much takers at that rate."

Channel 7


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