Economic difficulties hinder $60M bond float

Economic difficulties and higher prevailing interest rates are obstructing the prompt flotation of the tax-exempt $60 million municipal bond, which drag the completion of major infrastructure projects in the Northern Marianas.

Development Authority Board Chair John S. Tenorio said the government had to postpone the flotation of the municipal bond from March to June 2000 due to the higher interest rate prevailing in the U.S. market.

Mr. Tenorio said interest rates normally increase by 30 basis points or by one percent during the March-May period, adding that floating the $60 million bond this time would only stress the Commonwealth’s depleting coffers.

“We are just waiting for the right time or for the prevailing interest rate to fall because that would be more advantageous for the CNMI government since lower interest means lower monthly obligation,” he explained.

According to Mr. Tenorio, interest rates normally stabilize beginning June or July which, he stressed, should be the most appropriate time to sell the tax-exempt municipal bond.

CDA has been in constant communication with bond underwriters in the mainland U.S. in order to determine the most advantageous time to float the $60 million bond.

The bond is being eyed for use to match available federal funds under the Section 702 of the Covenant, which guarantees U.S. funding for Capital Improvement Projects that can be tapped only if the CNMI identified local matching money.

The CNMI government is pressed at identifying local funds in light of criticisms from Washington D.C. and the U.S. Congress on its inability to use federal money earmarked for the islands under the Section 702 of the Covenant.

The CNMI gets $11 million annually for CIPs. A backlog of approximately $44 million in CIP funds has been accumulated by the CNMI. The full amount of $11 million would be diverted back into the CNMI, but in the form of smaller increments over a longer period of time.

In order to fortify the salability of the bond in the open market, Mr. Tenorio said government finance managers have started looking at the stability of the Commonwealth’s fiscal house, particularly its ability to generate enough revenue and its capacity to reduce outstanding budget deficit.

Several other economic indicators, such as trends in visitor arrivals and the future of the Saipan garment manufacturing industry once U.S. trade quotas are lifted, are also under consideration.

However, the pending audit of the Commonwealth government remains the biggest concern in the $60 million municipal bond flotation which will be handled by mainland U.S.-based underwriter Paine Webber Inc.

Paine Webber handled the $16 million bond floated by the Public School System last year. Mr. Tenorio said this gives the agency edge over other underwriters in terms of knowledge and understanding of the CNMI economy.

Half of the total $60 million bond proceeds will be used to pay the $30 million borrowed by the CNMI government from the Bank of Guam. The interim financing was decided by the CDA board to nourish the economy with infrastructure projects identified in the 702 CIP Master Plan.

The government is hoping to expedite construction of infrastructure projects due to the possible multiplier effect of over $60 million worth of capital infrastructure projects which has been anticipated to reach more than $400 million in four years.

The CIP Task Force earlier completed the seven-year spending plan for $154 million in new capital infrastructure projects.