Fourth Annual Meeting of the Group of Latin American and Caribbean Debt Management Specialists

1

• Fourth Annual Meeting of the Group of Latin
  American and Caribbean Debt Management
  Specialists
• (LAC DEBT GROUP)
• May 14-16, 2008
• Port of Spain
• TRINIDAD

2

• DEBT MANAGEMENT OFFICES AND THEIR INTERACTION
  WITH THE MARKETS
• COUNTRY EXPERIENCE
• TRINIDAD AND TOBAGO
• PRESENTER
• JANETTE CUPID-ST.HILAIRE
• Director, Public Sector Finance Management Unit
• MINISTRY OF FINANCE

3
INTERACTION WITH THE DOMESTIC MARKET

• I. PRIMARY MARKET
• I.I. UNDERWRITING SYSTEM

4

• Traditionally, the debt management office (DMO)
  in Trinidad and Tobago has had a close
  relationship with primary market dealers. Being
  a small market with just six (6) commercial banks
  and a similar amount of merchant banks, the
  Ministry of Finance, for several years raised
  loans and issued bonds using the underwriting
  system.
• Requests for proposals were sent out, outlining
  the amount, tenor and structure of the financing.
  Bids were then evaluated and a preferred
  financier selected who will either fully
  underwrite the issue or will invite other banks
  and institutional investors to participate.
• This system was used both for deficit financing
  or for project financing. In the latter case a
  financing facility was set up and funds were
  disbursed on a phased basis.
• During this dispensation loans/bonds were
  generally of a long-term nature with maturities
  of 10, 15 and 20 years.
• Interest rates were either fixed or floating --
  depending on the environment -- and repayments
  were, by and large, amortized over the period.

5

• Main Participants
• Banks/Merchant Banks
• Insurance Companies
• Pension Funds
• Mutual Funds

6

• Drawbacks under the underwriting system
• The underwriting system tended to
• limit market access to the bonds issued
• hinder the transparency of the primary market
• inhibit the liquidity and development of
  secondary market activity in government securities

7
INTERACTION WITH THE DOMESTIC MARKET

• I. PRIMARY MARKET
• I.II. AUCTION SYSTEM

8

• In July 2004, the mechanism for primary market
  issuance evolved from an underwriting system to
  the single price auction system.
• In order to facilitate clearance and settlement
  of purchases through this system, the Central
  Bank expanded the electronic government
  securities system (GSS) to accommodate government
  bonds. This system, which was originally
  established for treasury bills and treasury
  notes, now incorporates both an on-line auction
  system and an integrated securities depository.
• The GSS is also integrated into the Real Time
  Gross Settlement System (RTGS) thereby allowing
  for the simultaneous settlement of transactions
  and recording of ownership in the depository.

9

• Main Participants
• Government Securities Intermediaries
• A total of eleven (11) financial institutions
  were selected to perform the function of
  Government Securities Intermediaries (GSIs).
  These institutions participate both on their own
  account and on behalf of the public. Initially,
  small investors were allowed to purchase up to a
  maximum of TT20,000 and a minimum of TT1,000.
  From November 2006 the upper limit has been
  increased to TT100,000 . Up to 3 of the face
  value of each issue is allotted to these
  non-competitive bids.
• Central Bank
• In addition to serving as an agent for
  non-competitive bidders (individuals and
  companies) the Central Bank manages the auction
  on behalf of the Government and performs the
  functions of Registrar and Paying Agent.

10

• Proposed Benefits of the Auction System
• increased market transparency
• increased participation (not sufficiently evident
  among the GSIs)
• increased competition
• reduced costs (no arranging and underwriting
  fees)
• an improved process of price determination
• increased trading on the secondary market as
  bonds are issued in a dematerialized form

11

• CENTRAL GOVERNMENT BONDS
• ISSUED UNDER THE AUCTION SYSTEM
• 2004-2007

12
BONDS ISSUED UNDER THE AUCTION SYSTEM FOR
STATE ENTERPRISES STATUTORY AUTHORITIES (2004
-2006)
13

• It is evident, therefore, that the primary market
  has not been particularly active so that by the
  end of fiscal 2007 the Public Sector Debt/GDP had
  declined significantly to 28.3 from a high of
  over 70 in 1995.

14
Total Public Sector Debt as of GDP (1995-2007)
15
INTERACTION WITH THE DOMESTIC MARKET

• II. SECONDARY MARKET
• II.I UNDERWRITING SYSTEM

16

• In Trinidad and Tobago, a liquid capital market
  requires active participation by the Government
  on the primary bond market. Except for the
  period 1999-2005 when the Central Government was
  engaged in bond refinancings, there has not been
  a regular schedule of bond issuance.
• Mainly responsible for this lack of bond issuance
  is the healthy fiscal position being experienced
  by the Government in that there has not been a
  budget deficit since 2002. This situation is
  expected to persist for some time into the future
  given the high and rising oil prices.
• Additionally, under the underwriting system,
  bondholders were mainly institutional investors
  who tended to adopt a buy and hold strategy.
  Activity on the market was therefore very
  limited.

17

• INTERACTION WITH THE
• DOMESTIC MARKET
• SECONDARY MARKET
• II.II AUCTION SYSTEM

18

• One of the main objectives for the introduction
  of the auction system in 2004 was to facilitate
  the trading of government bonds on the secondary
  market.
• To further support this process, the Central Bank
  and the Ministry of Finance are currently engaged
  in an exercise to dematerialize all existing
  Central Government bonds issued prior to 2004 and
  enter them on the electronic system. The first
  stage involves the transfer of the Registrar and
  Paying Agency Functions from financial
  institutions to the Central Bank. This exercise
  is expected to be completed within this fiscal
  year.

19

• Another significant step in the thrust towards
  the development of the secondary market in
  Trinidad and Tobago took place in January 2008
  when the Central Bank Governor officially
  launched the secondary market for government
  securities.
• This represented a gallant effort to motivate and
  encourage more active participation by all
  stakeholders primarily the Government, the
  Central Bank and institutional investors.
• Government must play its part by guaranteeing a
  regular and predictable supply of bond issues.
  This can be supported by bond issuances from
  state enterprises and statutory authorities.
  Investors will continue to hold bonds unless
  there is a regular supply to replenish them.

20

• Institutional investors must also be on the look
  out for profitable trading opportunities rather
  than simply accepting the traditional buy and
  hold culture.
• Central Bank, for its part, must ensure
  credibility in the auction process and must
  maintain an efficient clearing and settlement
  system.
• The Securities and Exchange (SEC) must also
  ensure that rules and regulations pertaining to
  secondary market activities are enforced so as to
  prevent improper trading practices such as market
  manipulation and insider trading practices.
• There is a view that participation on the
  secondary market under the new electronic system
  is being hampered by the fees that are now
  required. These include brokers fees, stock
  exchange fees as well as GSS fees. Under the
  underwriting system bonds were traded over the
  counter and there were no fees involved.

21

• INTERACTION WITH THE
• EXTERNAL MARKET

22

• Trinidad and Tobagos interaction with the
  external market, through its debt management
  office, has not been significant over the last
  ten (10) years and particularly so since 2000.
  In that year, there were two (2) incursions on
  the market, one for a Eurobond Issue of
  US250-Mn. and the other for a private placement
  of JPY11-Bn.
• Since Trinidad and Tobagos re-entry into the
  international capital market in 1992 (after its
  absence during the 1988-92 period of debt
  reschedulings), there has been a total of eight
  (8) Bond Issues. The last of these, which was
  issued in May 2007 for US150-Mn.), represented
  the refinancing of an Eurobond Issue which
  matured in December 2006.

23
CENTRAL GOVERNMENT EXTERNAL BOND ISSUES 1992-2007
24
External Debt as a of GDP (1995 2007)
25

• RELATIONSHIP WITH
• INTERNATIONAL LENDERS
• RATING AGENCIES
• Despite the limited participation by Trinidad and
  Tobago on the international capital market, the
  Government maintains a healthy relationship with
  a small group of lending agencies who pay
  periodic visits to the Ministry of Finance to
  discuss potential borrowings and to keep the
  Ministry fully apprised of developments in the
  market.
• The Ministry also has annual visits from rating
  agencies Moodys and Standard Poors and
  Trinidad and Tobagos current ratings on its
  foreign debt stands at Baa1 and A- respectively.

26

• THE WAY FORWARD
• Despite past and current initiatives, Trinidad
  and Tobago is still faced with the challenge of a
  relatively thin and illiquid secondary market.
  Ironically, the existing inflationary environment
  presents a window of opportunity for primary
  bond issues in order to mop up liquidity.
• Cabinet has also recently approved the
  introduction of Treasury Bonds for the express
  purpose of liquidity management. These bonds
  will be issued for tenors of between 5.5 years
  and 10 years.
• Efforts are also being made to prepare, annually,
  an issuance calendar including proposed
  borrowings of state enterprises and statutory
  authorities. This will aid the investor in
  planning his investments.
• Corporate bonds and bonds from state enterprises
  and statutory authorities must also be brought
  into the new electronic trading system.

27

• THANK YOU
• HAVE A NICE DAY!