$10b debt liability – A precarious financial position

Fiji Airways Airbus A350-900. Picture: www.samchui.com

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.

Total: $1,114.1mn

FNPF guarantee

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.

Fiji Airways

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.

Final analysis

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

More Stories