China in the Americas

To China or the Market? Commercial Creditors and Caribbean Debt Financing

July 25, 2022 Rasheed Griffith Episode 30
China in the Americas
To China or the Market? Commercial Creditors and Caribbean Debt Financing
Show Notes Transcript

To China or the market? Why borrow from a Private lender instead of China? In this episode, Rasheed talks to Federico Sequeda about why international US-based commercial creditors invest in Caribbean bond markets. 

Federico Sequeda is Head of Country Research and Portfolio Manager for the Emerging Markets Team at Eaton Vance. Eaton Vance is a part of Morgan Stanley Investment Management. 

Key Points Include:

  1. Fundamental Debt Metrics
  2. Why governments may prefer private financing over concessionary loans 
  3. Do Chinese loans crowd out private creditors 
  4. What are the data challenges in investing in emerging markets 
  5. Creditor committee views on IMF structural adjustment programs 

Resources Mentioned in this Episode

  • The Human Freedom Index (Fraser Economic Freedom Index, as heard in the episode)

I recommend pairing this Episode 28 on the Legal Dynamics of Sovereign Debt Markets

Connect with Federico Sequeda

Connect with Rasheed Griffith

[00:00:00] Rasheed Griffith: Thank you so much Federico for coming on the podcast today. 

[00:00:03] Federico Sequeda: Thank you, Rasheed. It's definitely great to be here. I've loved, listening to, to all of your episodes. They've been really fantastic. It's a, it's a very specific area, the relationship of China and the Americas. And I'm really glad that that there's somebody who who's looking at it.

[00:01:23] Rasheed Griffith: So I want to start about fundamental debt metrics and debt in general. Because obviously when you think about borrowing loans and well, sorry borrowing money, you kind of have to do that based on something.

[00:01:37] And I know that typically people look at the debt GDP ratio as like the standard bear for an any kind of debt metric. There's some obvious, weird flaws with that. I'm pretty surprised that this takes such a prominence, at least in eco reporting. And I'm not sure exactly any your Pacific business line, if it actually takes that prominence.

[00:01:57] But I'm curious if the debt metrics we know of is the best way to assess the quality of emerging market when it comes to making loans to them. 

[00:02:08] Federico Sequeda: Right, so Rasheed. I think that's a really important question. It's a, it's, it's a very important topic. Not only from the perspective of investors making decisions, but also frankly, from the perspective of how, international financial institutions, such as the IMF and the World Bank are judging the performance of different countries.

[00:02:27] So we certainly, and I certainly look at a lot of different, debt metrics, but we also look a lot at, at qualitative, elements, such as policy. Now with respect to debt levels, specifically in debt to GDP. You know, a lot of people look at a high debt to GDP say north of 100% or north of 120%. And they say, wow, that's a really high level.

[00:02:49] This country is, is going to default. It's in a really bad, bad shape. I look at that same level. And frankly, I don't take a lot of information from that number. I think there are countries that have high debt levels, which are good places to invest. And I think that there are, countries that have those same, high debt levels and are bad places to invest.

[00:03:08] And I find sometimes the, the focus on, on that number to be very problematic. There's a number of theoretical issues, with looking at debt to GDP. So, you know, just for, to rattle off a few is that debt, to GDP is not taking to account any assets, that you have. So it's a little bit of me, looking at you as an individual and saying, oh, you have a mortgage while you're debt to GDP is really, really high.

[00:03:33] But when they do that, I forget the fact that you also have a house and that house is, is worth something. Right? And there's many other theoretical problems like that. I would also just say that there's a very practical problem with debt to GDP, which is that even in practice, it doesn't seem to tell you all that much, because I think what we as investors care about is the future.

[00:03:53] And so I'll tell you a little bit about Greece, which I, I think is a good example to see this. If you look at Greece in 2011 right before it's restructuring, it had a debt level of approximately 184 percentage points of GDP. And then had its restructuring debt levels fell a bit because of it.

[00:04:12] And with the IMF did its debt sustainability analysis, at that time, it said it was really, really important that Greece's debt levels fall further because if not, debt would clearly be unsustainable. And at that time you had debt levels at about 160 percentage points of GDP. Now that was 2012, you fast forward to 2019 and debt levels were at about 185 percentage points of GDP.

[00:04:37] So actually higher than where they were before. So you might say, oh, Federico, so the country must be in a huge crisis and they must be about to default on their debt or have to restructure. But in fact, the, five year credit spreads for the country closed that year at about 110 basis points.

[00:04:54] So indicating a very, very low probability of default. And so what was going on there? Well, the main issue that the debt to, to GDP level was not taking into account is that you had a new government in that had a clear policy to try to bring the country back to fiscal sustainability, to have a predictable fiscal policy, to have an environment that was, conducive to growing the economy.

[00:05:20] And in that context, investors can say, actually that debt level is really, sustainable. But looking at that debt to GDP metric, doesn't take that into account. Whereas they think looking at qualitative things like policy can be really, really important. 

[00:05:33] Rasheed Griffith: Well, when you say a policy, is there more specific aspect of policies you look at?

[00:05:37] So for example, if we would typically hear about Japan has an outrageous, like 200, 6% debt GDP and someone like Cambodia has about 29% GDP debt, but intuitively we know these are not the same kind of countries. And someone that wants to invest in Cambodia will say, well, okay, the government's a bit autocratic or a lot autocratic and so on.

[00:06:02] So I'm looking at what aspects of policy are, is it also the structural policy? So you take it to account as well? 

[00:06:12] Federico Sequeda: Yeah, so the policy question is a complex one, but I'll I'll note, I guess, maybe three important policies. So one is the general support for the business environment.

[00:06:23] And support for the business environment doesn't necessarily mean that the country is trying to subsidize its corporations, but rather that it has a predictable environment where companies there can do business where there can also be competition, to make sure that that existing businesses are trying to do, their best and where the economy can grow.

[00:06:42] And that's a really, really, important part. And I think that's frankly, something that countries like the US, they actually do relatively well at, compared to some other countries. Beyond that there is also clearly fiscal policy, which is just, you know, is the country trying to have a relatively low deficit, and managing that deficit in a way that they can finance it? 

[00:07:04] The way that they can finance it is a pretty key part. And that varies a lot from country to country. Some countries just have more ability to finance their deficits, because there there's more savings in that country. In some other countries, you might find that they're more savings constrained in which case the country cannot run that, that large of a fiscal deficit. 

[00:07:22] The third policy that is important, and it is particularly important when you're looking at something like Cambodia, Japan versus Greece is monetary policy. One big example that people like to give when they say that debt levels don't matter is Japan. I purposefully actually picked Greece because I think one very important difference with Japan is that Japan has its own currency.

[00:07:43] Japan has a, has, has a central bank that is considered to be credible. And so lots of people are willing to lend to it in local currency. Whereas even in the case of Greece, where you actually don't have that monetary policy. So the central bank can bring its own money, it doesn't have its own local currency, but you can still see there that the effects of policy are actually really, really important.

[00:08:04] And in this case, the effects of policy are more specifically that the debt can be considered sustainable by virtue of having a much better business environment and fiscal policy. 

[00:08:14] Rasheed Griffith: When you are looking at business environment, do you look at simply World Bank doing a business report or some other kind of external metric?

[00:08:23] Federico Sequeda: Yeah, so we basically, taking approach of looking at at many different metrics, recognizing that anyone given a metric is flawed. So one that we think is good is the Fraser Economic Freedom Index. So this is an index that essentially is looking, at the amount of regulation in a country that is, looking, at the ease of trading across borders.

[00:08:44] Is looking at the quality of central bank policy. This is I think a very informative index. When you look at a lot of academic research on the effects of economic freedom, they tend to use that this index mostly. The problem is that it only gets, updated with about a two to three year lag.

[00:09:00] So if you wanna know what's going on today in a country, it's not very useful. The World Bank doing business indicators, were very useful. They are actually no longer being published. So that's one that they, you can depend on. But then there, there other ones that are good too, such as the, the worldwide governance indicators, which I believe are produced by the World Bank.

[00:09:21] Those will give you some good information, but as somebody who spends a lot of time looking at emerging markets and at, for tier markets and, to be frank as somebody who enjoys traveling as well, I think there's no substitute for actually going to the country and talking to the different people, just to understand the whole story and what's going on with policy. 

[00:09:40] And what, I mean, talking to the different people I don't mean just talking to government officials, but you also wanna talk to people in the private sector. You wanna talk to academics, people who work at think tanks, people who work at different civil society groups just to get the whole picture. 

[00:09:55] Rasheed Griffith: I'm curious if in, for example, these Index Fraser and World Bank and so on. Are there any specific categories that present red flags to you off the bat? For example, you hear know for a trivial example, you would hear, okay, this country takes two months to open the bank account. It takes two days here, any particular categories that are like very important to have optimized when you think about business environment? 

[00:10:23] Federico Sequeda: Yeah, that's a really good question. I would say that there's not actually one red flag across countries. Because each country has its own particularities and its own points that matter more. So, you know, just to, to give you some, some examples, you know, when, when we used to look at Venezuela it's not really an investible country now, but it used to be. Probably the main thing that you cared about was the quality of governance at the state oil company, which of course was very related to the quality of governance at the central government.

[00:10:54] And there, you know, a lot of what you're thinking about is things like corruption or the people in charge. So they actually have the, the requisite degrees to have those positions. When you look at a much smaller country that might still have a state oil company, but that doesn't produce any oil, frankly, the governance of that company of that state, own enterprise is just not that important. But there might be other things that, that, that you really, really care about. So it actually varies, quite a bit from, from country to country. 

[00:11:23] Rasheed Griffith: Okay. That's interesting. So you spend a lot of your time trying to figure out where to invest in the emerging markets, especially in bond markets. And you know, that kind of ask kind of demands to ask the question typically, why would a country want to borrow from a private commercial driven profit driven lender, as opposed to what we call concessionary finance? I have a view on that, but I'm curious why you think that that is? 

[00:11:49]Federico Sequeda: Sure. So, Rasheed, I think there's two things to think about when answering that question about why wanting to borrow a commercial. So one maybe the more straightforward one that people think about is that there's only so much concessional financing, right?

[00:12:02] So if I'm a government and I come into power and I decide that the roads in my country are very, very poor, and I really wanna build out that infrastructure, but I can only get concession financing up to a certain amount. And I'm looking at these roads and I'm saying, you know what? The, the IRR of investing in a road network is 20%.

[00:12:23] Well then, you know, borrowing money at a third of that cost is literally creating wealth, right? That's a very positive thing, even though some people might say, but a 7% interest rate is much, much higher than the 1% interest rate that you would get on the concession side. So it actually expands your ability to invest and it can literally create wealth. 

[00:12:42] A second reason that maybe people think about a little bit less, but I think is, is really important is that commercial financing oftentimes comes with A) a lot less strings attached and then B) it's also a lot faster.

[00:12:55] So, you know, this isn't directly an example of a government barring, but I think it's similar. I was once during a course at the Harvard Kennedy school and it was about a development about growth. And there was one person there who worked at a nonprofit in Colombia. This person approached that the professor was saying, you know what? I have a question for you. 

[00:13:15] My, my nonprofit is, is trying to grow. We have some really great things. We're getting this funding from the World Bank, but the World Bank keeps on asking for these other documentations. They wanna see this other study. They wanna see how the funds are gonna be used this way.

[00:13:29] And it's taking up a lot of my time. And the professor was very direct and he said, don't do it. You're telling me here that, that you actually have a lot of good things to do with your time that you're, that your organization is being impactful, but that you're not doing that impactful work because you're trying to fill out a bunch of forms.

[00:13:49] That can actually become a real cost of, for some countries. Now, I will say though, that when I say that the money comes with less strings attached, it doesn't mean that investors aren't looking to see what is going to be that the use of proceeds. In an ideal situation, a government and its investors are in regular communication so that when a government says, okay, you know, we need to borrow $500 million, we need to borrow 1 billion, 2 billion, they're not sort of building the relationship from scratch, but an investor can, can look at the country and saying, oh, the Dominican Republic. Okay. I know what they're planning on doing. They want to make some changes to electricity sector, but they need a little bit help with the subsidies.

[00:14:27] They're doing this, I've talked to the people, the story makes sense. And, and if that's true, then given the way the financial markets work, I mean, literally a minister could say, you know, Friday evening, Hey, I think I'd, I I'd like some commercial funding and they could probably have that money in their accounts just one week later.

[00:14:45] Rasheed Griffith: Do you know if there was a sort of bureaucratic creep when it came to concessional financing? Let's say trying to hear the goal, was it easier to borrow money from the World Bank? 

[00:14:54] Federico Sequeda: Oh my that's a very good question. So I understand that these organizations have grown over time. I'm not sure if the growth over time means that it's easier or more difficult to borrow, right?

[00:15:05] Because you could say that well with more people, you should be able to streamline the operations, but at the same time with more people, there may be more demands to be doing more or to be doing more supervision. I would say I'm really not sure, but I do believe that there have been more sort of KYC type checks and there have been some scandals in the past about where some of this money has ended up.

[00:15:27] So I wouldn't be surprised if there's actually more checks on the funding before it's able leave the multi institution. 

[00:15:33] Rasheed Griffith: That to me, it's interesting because I figured, you know, commercial lenders, they have to do lot checks as well, but still do it faster. I always find that kinda odd. So do you think that countries sometimes try to rely too much on conclusionary finance?

[00:15:49] Federico Sequeda: So I think that's a very good question and I would say yes, but I'll actually even rephrase my answer. And I'm saying, that the fact that we're asking that question means already that the framing has been mistaken. I don't think countries should be focusing, as a matter of policy, on achieving a certain debt level or achieving a certain borrowing rate.

[00:16:12] I think what should be happening is that a government should be saying, okay, what are, what are my priorities as government? Which hopefully should be reflective of, what would I like the goals and outcomes to be for the residents of my country. And then I should be focusing on those things.

[00:16:27] Right. And so what do most people care about? Most people of any given country. I would, I would love to hear a counter example here, but most people of any given country aren't so interested in knowing what the blended barring rate of their government is, right. They wanna know more about, okay, what, what are the, the educational, opportunities for my kids?

[00:16:49] If I wanna open up a business, like, what is the process of doing that? What are the job opportunities in my region? You know, can I move from one city to a different city and be able to do that in a cost effective way? You know, those are the policies that I think that the government should focus on.

[00:17:07] Of course, that doesn't mean that the government is just gonna be borrowing a lot of money, over a lot of money, over a lot of money. But the reason to not do that is because it's going to negatively affect some of the policy priorities that the government and its citizens itself, through a hopefully very participatory process, have decided that they want to go forward with. It's not actually the debt itself. 

[00:17:27] Rasheed Griffith: Hmm. Yeah, I think I agree with that. So you also, I think maybe you don't specifically focus, but you do have a lot of investments in the Caribbean. I'm curious what about the Caribbean? Is it just because it's just, you know, part of emerging markets? What about the Caribbean has a better interest for you?

[00:17:49] Federico Sequeda: Yeah. So that's a very good question. So I actually grew up in Colombia, not on the Caribbean side, on the Pacific side. But, you know, that basically led me to be very interested, just to start out with, in the region of Latin America and the Caribbean. In my current role, my job is to find investments in countries that look good on a three to five year basis.

[00:18:10] And so from a work perspective, I'll tell you, and I think anybody who has done investing will also tell you that it's really important to find an edge. So there's a lot of very smart people who work in asset management. There's a lot of very hardworking people who work in asset management. And I'll think a lot of people, particularly when they start out, they say, okay, I'm just gonna try to be smarter and work harder than everybody else.

[00:18:35] And that's gonna be my edge. And then they sort of quickly noticed that that's not gonna work out for them. And so from my perspective the Caribbean, because it is a smaller size than most other investment destinations, it just tends to not get that much focus. So people tend to gravitate more towards all what's gonna happen in Brazil, what's gonna happen in Turkey, and in South Africa, these are the big countries that, that hit the headlines of, of the financial times and the wall street journal. 

[00:19:04] Whereas I kind of find  that I wanna gravitate towards those places where I think other people aren't looking that much and still places that I think are very interesting because they have a lot of different issues going on in those countries so that I can find some interesting places.

[00:19:19] Now beyond that on a more personal note, so my wife's family is from the Caribbean. And so, you know, that's, I feel that's always a good, personal reason to learn a lot, a little bit more about the region. 

[00:19:30] Rasheed Griffith: I see. So, so I'm from Barbados, you know, smack middle in the Caribbean. And, you know, I would have these perspective reservations about dealing with Barbados' government or other Caribbean governments. But I think, you know, in a previous conversation, we spoke about the difference between, you know, debt investment and equity investment, where now looking for the entire government to pull things wrong between that generation. So much more short term window. Could you discuss the different features behind that? 

[00:20:01] Federico Sequeda: Yeah. Yeah. So debt investing versus equity investing is a huge distinction. And you see that not only on the sovereign side, but on the corporate side as well. I guess I'll mention three things.

[00:20:11] One is the symmetries involved, the second is, is the tenor, and then the third is a little bit about the personality of who decides to get in involved in which.

[00:20:20] So, you know, just to start out with the asymmetry, you know, when, if I decide to buy stock, if I decide to buy Netflix or GameStop maybe, or you know, IBM or Apple or Ford or whatever. My upside can actually be really, really large, right. And in fact, historically, when, when you look at some of these stocks, you see that, that they go up and value 100%, 200%, a lot more. And it's because the underlying drivers of the stock price, which is just your discount to dividends or earnings over a very long period of time can move around a lot.

[00:20:53] Now with bonds you don't have that, that sort of level of excitement. Really what you have is at most, you get paid back your interest, plus the money that you put to begin with. So that's the return profile of debt versus equities. With debt, you're not looking necessarily for a company, that's gonna be really, really exciting and be the next, you know, Uber or the next big thing.

[00:21:15] You're more interested in, okay. Can the country in place actually, be able to make these payments over time? So the discussion that that you're having is a very different one. That might also explain, you know, which I guess that gets to, I can see why an equity investor in the Caribbean has a very different view than a debt investment in the Caribbean.

[00:21:33] If a country's gonna grow slowly, but steadily at 2% for a debt investor, that that might be perfectly fine. You know, the country can service its debt based on that. For an equity investor, who's looking for growth that might be really disappointing. And so that that's, I think is one difference.

[00:21:49] A second difference is the, the time horizon too. So with debt, you normally not always, but you normally have a relatively fixed maturity, so we'll call it five years, 10 years; if you go really, really long, 30 years. So when you're looking at what's gonna happen in the country, you can more or less say like, okay, I'm planning 10 years out. I'm planning 15, years out. 

[00:22:10] It's a little bit different than when you're thinking about equities where people will generally say, well, no, that, you know, that I'm, I'm assuming that the company will be around for 30, 40, 50 years, whether or not that's a good assumption is a separate discussion because we all know of large companies that have gone bankrupt.

[00:22:26] Of the third part that the equity versus debt is about the type of person who gets involved. People who get involved in debt investing tend to be a little bit more, mathematically focused, just because you have a kind of, a lot of fixed cash flows. You have interest rates, you can do math. If you enjoy doing math, then you can, you have a lot to do in the fixed income space. But then also it will tend to be people who wanna deal with macro issues and with understanding countries, just because, you know, countries issue debt, but countries by and large don't issue equities. They sometimes issue equity like instruments, which can be very, very interesting.

[00:23:02] But you know, if, if you're the type of person who is really interested in history and politics and all of that then that type of person tends to become a debt investor. 

[00:23:12] Rasheed Griffith: So, okay. We have this Caribbean debt, you know, profile differentiation. What then do you look at, in the Caribbean? Well, in any particular country, but in our case, the Caribbean here, what do you look at an emerging market or small, especially small ones? To say, okay, you know what, it's, it's trying to put 500 million here and let investigate three years. What profile is that? 

[00:23:37] Federico Sequeda: Okay, so, so let, let me answer that question in actually two different ways. And one way is the way I think that that works generally for the asset class, not necessarily what I'm trying to do. And then I'll talk a little bit about what, you know, what I'm trying to do and what my colleagues are trying to do.

[00:23:54] So first off, talking about emerging markets as an asset class, and then the Caribbean, as part of that. Essentially all funds, in that space, you can categorize them as active funds or passive funds. Active funds will not really follow a benchmark or will follow a lot less passive funds will follow benchmark up pretty, pretty carefully.

[00:24:15] So let, let's just stick to the passive side. So if you look at the universe of emerging market debt denominated in dollars, governed by foreign law, which are all important distinctions, very, very roughly Europe, probably about like 1.2 trillion or something like that. Now, when you look at that number for the Caribbean and I'll call it the traditional Caribbean countries, even though I know that the definition of Caribbean is still somewhat, up for grabs.

[00:24:44] I mean, you know that one will be more like $40 billion. So it's only about like 3 to 4% of the overall asset class. Now passive funds will follow a benchmark, for us in emerging markets is generally the JP Morgan emerging markets bond index. And so they will then allocate capital to different countries just based on what that benchmark says.

[00:25:06] The benchmark reflects more or less the actual issuance of debt. So the Caribbean will be approximately 4% of their allocation. And so just off the bat, that's actually telling you a lot of the money that goes into the Caribbean debt markets is a function of things that have nothing to do with the Caribbean.

[00:25:24] It's a function of what the index says. Then it's a function of whether or not large institutions with money such as pension funds, insurance companies decide to invest in emerging markets. So that's the answer for the sort of the broad universe of primarily passive. 

[00:25:40] Now, what, what we do, and we do take a very active view is we say, no, we actually want to pick countries. We understand that the benchmark exists. We will pay some attention to the benchmark, but we'll, we're trying to take a lot more active views. And so actually going back to what we, we discussed, at the very beginning, we're gonna look a lot at policy and more specifically the direction of policy.

[00:26:04] And then we're also gonna look at valuation. So when we talk about the direction of policy, you know, the primary question that we're trying to answer is in three to five years, do we think this country is going to find itself in a better situation or not? And better is a really, operative word here.

[00:26:23] So if a country's in a very bad situation today, but it looks like it's getting better, we, we're probably really excited about that country. And conversely, if there's a country, that's in a great situation today, but it looks like it's probably gonna get a little bit worse over the next two or five years we're not very excited about that country. 

[00:26:42] And you know, when we talk about policy again, we're talking about things like the ease of doing business, how hospitable that country is for capital and for labor. And then we're also thinking about things like fiscal policy, monetary policy, and whatnot.

[00:26:58] And again, when I, when I talk about policy, I think some people think that policy means just what the government says that it's going to do. There is some truth to that, but you also wanna see how much support there is for what that government says that it wants to do. So in that sense, you wanna understand the power relationships in that country.

[00:27:16] In some countries, the unions may be very strong. So you want to understand what the unions are thinking. In some other countries, may be religious leaders and it, again, it really, really varies. So that's one, the policy, and that's the direction of change. Now you wanna overlay that with valuation, right?

[00:27:32] So bonds, you can decompose to the price of the bond mathematically just into the probability that there's a default on that bond, the recovery rate or loss given default, and then just US interest rates. And so what you can do then is you can just calculate what is the price and probability of default.

[00:27:52] And you can say, you know, given the very basic things that I know about this country to, given the information today, does it seem like the probability of default is very high, or if it's very low? And so in an ideal world, what would be a great investment would be to say, okay, I actually think that policy in this country is getting better.

[00:28:11] So I said that the business environment is improving. Fiscal policy is getting better. Monetary policy is improving, trade policy, etcetera, et cetera. And I think that the probability of default today is actually too high, given what I see today. And, those are, the two things.

[00:28:29] Rasheed Griffith: Now, when it comes to a country that has default in multiple times. For example, it believe is (inaudible) but you still put more money. So I'm curious what this particular case in Belize. What is it that gives you the confidence to do another investment? 

[00:28:46] Federico Sequeda: So, I'll answer the question of Belize a little bit from the abstract, at least from, from what I believe that investors were perhaps thinking, because Belize is one country where we have not been, involved in, and that's primarily because we, you know, we didn't see that there's, [what would be what] we were looking for.

[00:29:02] So a country like Belize, I think becomes a very niche investment. So for some countries, you know, they, they've had a, unfortunately, a long story of defaults or structurings, which frankly have not benefited, I think neither the country, nor the investors. But because of that, you've had investors who have built up a lot of expertise on the country and they probably feel more comfortable holding back what they know. 

[00:29:30] Also to be quite frank I would assume without having specific hard data, that if you were an investor who held a large position in Belize, it may actually be relatively difficult for you to sell that position. And you know, you can think about it. It's a, country that has a debt outstanding that is relatively small.

[00:29:49] So it already means that there's not a lot of other people looking at it. Other people looking at the country are saying, okay, you know, there's a number of things here that I may not particularly like, I may be concerned about another debt restructuring. But importantly, I know that I don't know a lot about the country.

[00:30:06] And then they get a phone call from somebody else who really knows Belize and says, Hey, I actually wanna get outta my position. Do you wanna buy it from me? And of course, you know, talking about red flags that that raises all sorts of red flags. 

[00:30:20] Rasheed Griffith: Okay. So, okay, what about then, I'm curious how the approach works from your perspective directly. So I know you have a belief or business position have, or had I'm too sure. Barbados is relatively very stable in the Caribbean. If one thing, I think last default was technically I think [during the] 2000's and what 1990's perhaps? Or something around that time. I'm curious how in the event where you have a large position in, on one country's bar portfolio, and then the country can't repay the borrow portfolio, and then it has to go through some sort of restructuring process.

[00:31:02] How do you have a hands on involvement in that to make sure that you aren't essentially, you know, destroyed by that restructuring process? 

[00:31:12] Federico Sequeda: Right. So, so, so this is a good question. It's a tough question too, but you know, these are certainly the things that we as bond investors have to deal with.

[00:31:20] We would always love to be talking about the countries where everything is getting better, but, every now and then we recognize that things are not gonna go well. Sometimes it's, it's nobody's fault. Sometimes it is somebody's fault, but regardless, we have to deal with the situation. You know, as creditors, there's a couple of things that we would want to do, or at least that we would like to have happen.

[00:31:40] I think that the first important part that you wanna do as a creditor is you would like to engage with the government and, and hear about what the government's plans are. And you would also, hopefully engage with the government and talk about, you know, what you, as a creditor could be willing to do. A really, really important here is what people call preemptive versus post default restructurings.

[00:32:03] So there is a long, academic literature about restructurings that happen before a four world default has. So the equivalent here is, you know, I can't make my mortgage payment by the end of the month. So I go to the bank of Rasheed Griffith and I say, Rasheed, I would like to pay, but I just can't do it.

[00:32:21] I'm coming to you now. Can we work something out? You know, I'm gonna try my best, but I need a little bit of help from you. The post default is, you know, the end of the month comes by and I didn't pay. And I didn't tell you anything and you have to come knocking on my door and be like, Federico, what's been going on? It's been two months. And it's very clear that the outcomes for both parties, creditors and debtors is much better under the preemptive restructuring than under the post default restructure. 

[00:32:49] So, so again, adding this back to the engagement part, you know, the first part that we would like is to really talk to the government, understand what, what they consider to be the problem, understand what they, consider to be the solution.

[00:33:00] And then we can also tell them, you know, a little bit about sort of, how we view the situation, I think, in, in all of this time, like very cognizant that we're just foreign investors, right? Like we actually don't have any, any direct say into what the government's policies are.

[00:33:15] We respect that that's very much not our role. But we're happy to share our opinions. Now, you know, we would, in general, like to see if, if there has been some, if it's been a more structural issue, you know, not just, a shock that hit the country and that was completely unforeseen, that there would be some adjustment to policy. That adjustment normally would happen hand in hand with the IMF.

[00:33:40] So engaging and really understanding the other side. And it's just a very basic human thing. I think that, you know, you want to talk to the other person, you wanna understand the other person, this is true personally, and this is true in business as well. 

[00:33:52] The other important thing that creditors need to do, which sometimes doesn't get discussed enough is that creditors need to coordinate with each other as well.

[00:33:59] So I'm a large holder in a restructuring say, I hold 10% of the debt stock and there's a default. I think it's incumbent upon me to go and reach out to other creditors and say, Hey, something happened. We need to get together. We need to understand, you know, what the view of creditors are.

[00:34:18] This is really important because ultimately to restructure a bond, given the legal clauses, and I know that you, discussed this with Thomas on one of your prior episodes. In many cases, we'll need to have 75% of creditors vote to say, yes, we are willing to do this or else absolutely nothing will happen.

[00:34:35] And in most cases, really 75% is kind of the bare minimum. You would like more like 95, 99% unanimous. And so you need creditors to get together. And I think you, you see empirically actually that, when creditors get together in one single creditor committee, a unified creditor committee, you see that restrictions are a lot shorter and also that there tends to be, less litigation involved. 

[00:34:58] When you have lots of creditors, dispersed creditors is when you tend to get a lot more of the lawsuits. So again, I think engagement, is, is what we would like to see. Related to some policy plan that is, might be related to the IMF and happy to talk more about that as well. And then the second thing is creditors need to coordinate as well. 

[00:35:17] Rasheed Griffith: Yes. I want dive into that. So the IMF, not always, I think it's fair to say, not always is the most efficient structural adjustment program coordinator. And I'm curious then there are, or should be red flags oftentimes. Yes you're not a direct, for example, you're not for example, a citizen in the country or not a company in the country, but you have a (inaudible) in the country and you would have certain views that the IMF may not have.

[00:35:46] But what happens in situation where the IMF really is trying to strong arm the government into one direction, and anyone looking outside can say that may not be most efficient direction, but in my case, as the credit investor, that itself has me in a very challenging place. How do you kind of deal with that scenario?

[00:36:10] Federico Sequeda: To make sure I answered the right question, you're asking not just about the IMF strong arming the government, but also the IMF strong arming the government in a way that hurts creditors? Okay. Okay. So on the first part about IMF, strong arming governments, and you know, this is, I'll give you at least the stock response that the IMF would give you if you ever asked this question, which is that, the IMFs counterpart is with the government, and so the IMF would not directly engage with creditors on any of these issues that if we want to engage with any entity that would be with the government. The IMF itself considers itself, not to be a party to any restructuring or anything like that.

[00:36:50] So they may listen to us. They may provide us very factual updates, but they're not intended to really engage with creditors. And hopefully, I'm representing fairly the views of the fund. Now I do think that there's a lot of truth to that. So, you know, if the government, is properly advised and in such a process, I do think it's important that the government get good financial advisors because talking to the fund is not an easy process.

[00:37:19] The fund has many, many trained economists, trained lawyers who have very strong views. And if you disagree with them, I think that the IMF is almost always willing to have a discussion. But, you know, you have to be prepared to have that discussion sort of at that intellectual level that the people at the fund are, are going to wanna have. But the government does have to push back.

[00:37:39] And I think if the government is properly advised, or if the government has the proper, human capital, within its own offices, then they should be able to push back. Just to give one example, you know, I understand that this is very much what has happened with Jamaica. Jamaica has gone through a couple of IMF programs and I believe, at least it was the one that the Jamaica, the JDX maybe also the follow up to JDX, the government pushed back to the IMF when the IMF said that it wanted to see that the policy plan, be formed in a certain way and they were able to do so successfully.

[00:38:13] So I do think that that is something that the government can do. And I will also note that at least I believe that the IMF today is very different than the IMF that we saw 20 years ago. And, you know, when you had the structure adjustment programs, that was a very cookie cutter approach.

[00:38:28] It was very much okay, your country's gonna come in and they're going to devalue the exchange rate, they're they're going to tighten fiscal policy, they're gonna cut social spending. And the IMF still does a degree of that, but I think to a much, much lesser degree than what it used to. You know, to the point that the IMF recently put out a paper saying that capital controls were okay in some instances, which is a great departure from what they'd done before. So that's the first part about the IMF trying to, to strong arm the government. 

[00:38:58] Now, when it comes to strong arming the government, or perhaps frankly, maybe the government and the IMF agree that they wanna do this, but it's presented as a policy that's coming from the IMF to creditors. It's a negotiation tactic, which, I mean, I understand that tactic.

[00:39:16] I think what creditors have to do and should do is say, okay. So, as I said before, you know, we creditors, I don't think have a say in how the, in what the government's plan should be. However, I do think that I as a creditor, more specifically as a representative of my clients, have a very strong duty to protect my client's assets.

[00:39:42] And if anybody is going to ask our asset or our client's assets, cuz they're not actually in advanced Morgan Stanley's assets or the assets that belong to our clients, if they're going to say that these assets should be written down by a certain amount, well, I need to be able to go to my board and tell them this is the best deal that we can do. And this is a fair deal. It's an equitable deal. It is a reasonable deal. 

[00:40:10] I can't go to, to the board and say, well, the IMF or the government or this other organization really wants us to do this. That's not really a very good argument. So what, so all that I can say is if there's a proposal that is not equitable, that is not fair for our clients, then that's not a proposal that we can take.

[00:40:32] Rasheed Griffith: Mm. So again, so again, what would you do? So how do you get then to a position where it's a much more fair or at least, you know, proceed to be fair proposal? 

[00:40:44] Federico Sequeda: So, this is when the re when a restructure becomes protracted, right? So in this case, unfortunately what you have to do is wait. And you have to wait until the other side is willing to review what the, either what the policy plan is, or frankly, just what they're offering to investors in, in a way that that is fair and reasonable.

[00:41:04] And you know what, it could also be that with time and analysis and conversations, again, I think engagement is really real important here. It may be that I, as a creditor recognized that I was actually wrong, and maybe I was asking for something that wasn't fair or equitable, it's perfectly fine.

[00:41:18] But, I do think that it's important for the parties when they're talking and researching to be transparent and to really be putting their cards on the table. If they don't do that, and if they start by saying, well, you know, this country is never going to grow again.

[00:41:33] And the country needs to run really large fiscal deficits. So we need a 90% haircut, that's just not really credible. And since it's not credible, I can't accept that. And since I'm not going to accept that, then the researching process is gonna take a lot longer. And that is not something that the government wants.

[00:41:49] And, and the IMF also has a number of, well, both, both legal, kind of like legal frameworks in places. Well, some policies that means that they can't really be lending a lot into a position, when there's never going to be any debt restructuring. 

[00:42:04] Rasheed Griffith: Have you been in situation where the, say, the the negotiation was so protracted that you had to find the alternative method of going forward?

[00:42:16] Federico Sequeda: So I think sometimes pauses are productive things in a negotiation, you know? So I think for sure, we've had the times where we were talking a lot you know, you probably sometimes find this if you're arguing with a friend or with a not friend, sometimes it's good if you like pause for 30 minutes and you come back and then you'll actually be more willing to discuss.

[00:42:37] So, I, I think that definitely happens. Say that, for me though, it's not as much as trying to find a different method, but sometimes it's very important to know who you're talking to, who that person represents and also, what authority that person has. It's really important, I think, to have principle to principle discussions.

[00:42:57] So when you're talking to somebody you want to see. Am I, am I talking to somebody who has been told, Hey, here's some three talking points, go and give the, these three talking points. And if they say something, go back to one of the three talking points and keep on doing it over and over again. That discussion will actually be useful for maybe the first 30 minutes, because I'm sure there's three talking points are relevant.

[00:43:19] But if you're trying to get to a deal, right. If we're, if I'm here and then you're over there and we're trying to get a little bit closer, that discussion might not be very useful. So you might have to stop and say, okay, maybe I should be talking to somebody else. And I think that that is something that is relatively common, that happens in many restrictions.

[00:43:36] Rasheed Griffith: Mm. I see. When you're again, looking to invest in a, in a bond market for emerging market, or even after the restructuring process is happening. You need more credible information [for] you to come to your own conclusions. Do you typically have a problem when it comes to the information provided by, these small countries who may not have the human capital capacity to produce as much data as it would like?

[00:44:06] Federico Sequeda: Yes. That is a major, major problem. And I would say that is one thing that many of these countries could do that I think would actually lower their borrowing costs and increase the group of people who would be willing to invest in that country. I actually remember, one of my former RAs would joke, when he was still my research associate that he wanted to go to the Caribbean and set up an office that would just improve the investor relations website of all countries.

[00:44:33] And he said that this would bring down baring costs enough so that they could finance large payments to him and whatnot. And I think he was certainly onto some things. There's many small things such as spreadsheets are uploaded in PDF format. PDF formats are notoriously crazy to actually extract the information and put them into any sort of software that you're gonna use to analyze that data.

[00:44:57] And, you know, that they started out, but with the spreadsheet, you know. So that, there's a, they're very small, small, small things like that. I will say, the IMF does a pretty good job here at software. I think almost any country, releasing a report of what data that that country releases and, what data that country does not release importantly to how frequent it is.

[00:45:20] So, so I know that are some major countries in the Caribbean that don't actually release quarterly GDP figures. In some cases, the annual GDP figures are actually delayed. You know, I will say, you know, there are days where I'm feeling a little bit more selfish and I'm saying that's actually a really good thing because I'm willing to go through the work of slogging, through all of these websites and understanding what's going on. But you know, it's not good for the country.

[00:45:44] Like this is just showing up in higher financing costs. And then I will say there are separate issues too, which I wouldn't call them human capital related, but there is still like a lack of transparency in some documents where you just don't have them. And I'm happy to talk a little bit about that as well.

[00:46:01] Rasheed Griffith: So okay. Both that. So one, I also suspect given my own investigation into this particular problem that sometimes GDP is not even properly calculated, in many cases. Curious if you could spell out first what exactly would be the mechanism that if they have better information, they will have lower borrowing costs.

[00:46:23] Federico Sequeda: Okay. So it's two things. So, for one is you literally have a group of people who won't look at certain countries who won't look at any investments, period, unless they have a certain amount of data. These tend to actually be larger institutions where they say they have a much more formal process where they say, well, we wanna look at this very specific metric A and we compare that this metric A across countries, and we want this metric A to be above a certain level.

[00:46:49] But if you can't calculate metric A for that country and the country, by the way, is small to begin with, so you feel like you can ignore it. It's not Brazil or Turkey where you might feel like you have to go and manually calculate that number itself. Then effectively, that country for that investor becomes uninvestible.

[00:47:05] So when you have all of that information out there, then that country does become it literally becomes investible for some people who weren't going to invest. And just probability wise, some of those people will end up investing in that country and so that, that will lower baring costs. So, that's one thing.

[00:47:21] A second thing is a little bit less straightforward, which is that fixed income investors tend to be pessimistic people. As I told, you know, our whole business is in some sense, you put par in and you hope to get par plus some coupons back. That that's not a lot of upside. And you're all the time thinking about potentially losing 100%.

[00:47:42] What that means is that a lot of investors, if they see that there's some data that's not there, they generally tend to make the worst possible assumption. And maybe not worst possible assumption, but they're likely to make an assumption that they think is conservative, right. And conservative means on average, that's gonna be worse than reality.

[00:48:01] And so that means that they're gonna be treating the country as if it were a worse credit than what it actually is. So again, those two things. The first one is just by having the data be available, people will be able to, to analyze it. And the second one is just the conservative nature.

[00:48:18] Fixed income investors means that releasing more information is almost always the right thing. Even though I hear government officials remark and I understand their point that they're just concerned that if they release information and people misinterpret it, that it's gonna be wrong. Totally fair concern. But I think in practice that ends up not being the case. 

[00:48:37] Rasheed Griffith: Is this a problem that can have a private market solution? Or for example, the government justice not produced the data in answer if you can't format it properly. 

[00:48:50] Federico Sequeda: You mean a private market solution in the sense that perhaps some other vendor could try to compile that, that information and distribute it?

[00:48:56] Rasheed Griffith: Yeah. Like for example, does the data exist somewhere, but it's just not in a good format? Or the data does simply does not exist?

[00:49:05] Federico Sequeda: Oh, I, yeah. So, so you definitely have two of those things going on. So sometimes the data doesn't exist in a very useful format. And actually there are, unsurprisingly, vendors which are intended to specialize in just getting data, cleaning it up, putting it in a well or organized way, and then having an API so that investors can download that data.

[00:49:28] I'll say even from knowing some of these vendors and using them still, for some reason, they don't cover the Caribbean country. Maybe it's because they're just too small and there isn't enough, demand for it. But yeah. Then, there's also probably some data that, that isn't produced and I think that's something that's more difficult to actually face.

[00:49:47] I would argue that it seems like this is the sort of problems that the IMF would love to provide technical assistance missions for. The IMF is really good at dealing with some of these data issues. So I think it's still a problem that most countries could try to solve. But yeah, but, but that one does, does become more, more, more difficult. That's a fair point. 

[00:50:06] Rasheed Griffith: But it seems if it's a still a problem, see, I'm actually not very good at solving the problem then given they have to also know the problem since the last 20 years. Anyway. So, I'm curious now about the emergence of Chinese state bank lenders in Caribbean.

[00:50:26] So you see recently a lot of Chinese governments have been going to Chinese. Sorry. A lot of Caribbean governments have been going to Chinese state banks to have loans. And, I believe it was last year or could be even 2020 pandemic time lapse. The minister of finance of Trinidad had mentioned that he preferred to go to the Chinese state bank and not the IMF. Floyd mentioned earlier, it's two complicated to go to IMF. And also the IMF has too many requirements to go loan, taking the money. 

[00:51:06] But it seems like on one level, it's good things that the Caribbean governments can take in money easier from these alternative venues. But I think that the actual critique of Chinese lending, I don't really hear much about is that it subsidizes bad policy. Because actually it's a bit more easy to get the money that's not a good thing. You're not forcing any money. There's not some debt trap by same time its subsidies, the governments are having to continue to have, you know, poor data, not good commitment, longer commitments kind of finding the sky policies and so on.

[00:51:43] So I'm curious know if in your day to day job has this emergence of Chinese lending Caribbean impact how you can actually lend in the Caribbean? 

[00:51:52] Federico Sequeda: Yes. Okay. So that is a multi-layered question. I'm actually curious to know what your answer to the broader question of how is it that the Chinese lending is affecting private sector, lending to the region. But let me give you my view of that first. 

[00:52:05] So one is, okay. So, gosh, there's many different ways to answer this question. So, let me talk a little bit about how I see potentially the way that Chinese lenders behave to be, not at odds, but just a different approach than other lenders make some comments about debt carrying capacity.

[00:52:22] But then I'll go back to the size of the Caribbean. My understanding is that a lot of Chinese lenders and some of this, I've learned from your podcast and for listening to guests on your podcast is that they tend to think of themselves as project lenders. So they will think about, okay, you know, there's the Sam Lord's castle or, or some other project, and I'm looking at the economics of that project. And if the economics of that project looks good, I will then lend to a ministry. Or I will lend to the government in such a way though, that it is an irrevocable obligation of the government as a whole. So it's not the obligation of a specific state of enterprise, but it has— and if it were though, it would have a government guarantee.

[00:53:04] Now that's a little bit different, than the way that say, you know, investors in a space such as mine, think about their lending. We generally think about our lending as not being specific to a project. So we will lend. And when we lend, we ask the government about what they plan on doing with the money.

[00:53:24] And they may say, well, we actually want to refurbish Sam Lords, but we take the view. And I think most economists would take the view that well, money is fungible. And it doesn't mean necessarily that the money was, was going to this project, you know, may maybe you were going to build that project anyways.

[00:53:42] And if we didn't lend you the money, what was gonna happen was you are like not gonna buy new computers for your ministry of labor or something like that. So we tend to be interested in these proceeds. But we don't think that it's the project economics they're necessarily going to guarantee that were repaid.

[00:54:00] So this can then present potential issues down the line. If a lender called it the X and back, or somebody else is saying, well, our project economics worked right. They were good economics. We knew exactly what we were lending to. You just spent a lot of money on other things, and that's why you can't pay us.

[00:54:16] But in reality, you can't pay us because those revenues from the project, you should be thinking of them as ours. And I believe that that's authentically what they're thinking of. Whereas for us, we're thinking about it more as just one big pot of money. So at least that's one potential issue. I'd say so far, I haven't seen that issue become very salient, but I can foresee maybe in some other countries that are on that have restructurings, what China, start to see some of that go on. 

[00:54:44] Second thing is, and this goes very much to your point about sort of the subsidizing bad behavior. I think that is very much, well, I, I think that the incentives are there. Right? And I would say in particularly you would need for that to be true for the Chinese lender to not really be scrutinizing what that money is ultimately going to be used for.

[00:55:04] And if that happens, then that certainly lowers the cost of bad behavior, and you probably get more bad behavior. Now, you know, I was talking before about how debt to GDP doesn't really make sense as a metric. One reason I think that is because one of many reasons, I should say, you know, what I'll call the debt caring capacity varies widely from one country to another country. 

[00:55:27] And so there may be a small country such as Cambodia, which can only sustain 40% debt to GDP. You know, this is something that, you know, people like Michael Pettus talk about very well. It depends on what assets you can build, or it depends on your, the ability of the different agents in your country to allocate money to different investments.

[00:55:47] If you have many different investments, you can probably carry on a lot more debt because you have productive things to do with that money. But then also if you have more ability to withstand shocks, then your debt carrying capacity goes up as well. So debt is mostly a fixed number that you have to pay each year.

[00:56:03] But if you have more adjustment valves, then you can probably carry on more debt. Strangely enough, if you say, well, I have this other lender here called China, which is able to come in here relatively quickly at a moment's notice. And we have a really great relationship that may increase your overall debt capacity, even adjusting for additional debt from China.

[00:56:24] So in that sense could be that private investors would say, oh, now I'm more willing to lend because China is lending. Again, I think this is, it's a little bit theoretical because it depends on, well, do you think that the Chinese lending is subordinating you? Do you think that the Chinese, if you think the Chinese lenders are not really doing any sort of due diligence, then you might not think that the debt carry capacity is higher. So I think that can potentially expand upon issue that you're bringing up. 

[00:56:52] The third issue is I will say, and just in terms of sort the crowding out or not of private capital, the Caribbean market is pretty small. And again, because of the way that the Caribbean market is set up, there's not a lot of great data on it. Issue sizes are not very liquid. You don't see a lot of investors who are sort of trying to get in on the Caribbean market. And so my guess is that you probably don't have a lot of crowding out purely because there's not a lot of people trying to get through the door. So you can probably have more people fit in the door. So anyways, it's a very, very good question. But actually would love to hear your, your take on it?

[00:57:31] Rasheed Griffith: I suspect over time, there might be more (inaudible) because, you know, because (inaudible ) are so small that this, let's call it project based financing does impact quite substantial of borrowing.

[00:57:44] So, you know, three projects could be a, that would that be the entire purpose of have an entire (inaudible) period for half a year. So I think that (inaudible) . Even, you know, for example, so many, many years ago, this is our data did aspecific bond issuance. For to build port dewater, how reported bar business. This was a very unique one because it was a yen bond. 1970s, sixties could be in the fifties, to be honest. And the country got wrecked because then Japan met boom. A lot of the positions were kind of hard to fill and that's, you know, cascade it into an email crisis for dumps. Now I do suspect there will, there will be a UN bond in Caribbean very soon.

[00:58:30] And that's not because it's strictly good idea. It's because I think for a political expediency of borrowing money, when it comes back to, poor fiscal policy. I think that might be an option for, you know, to combine marketing and easy money at the same time. I think that, you know, so we first Caribbean (inaudible) on the beach, you know, something like that I think will happen pretty soon.

[00:58:54] I do have the problem because the Caribbean governments in my view are actually not pruded. The way you have parties willing to meet that non actually with money, that's the very bad combination. Now, at the same time, I also fully accept the ideas that sure, Caribbean governments need to get money to fund projects. And therefore having more funds is a good thing.

[00:59:22] But I really do think that the reason why they can't get money is because they don't have good structures in their financial departments where their treasury and can't bar commercially. And I think the lack of commercial borrowing is actually the reason why Chinese can learn more money in the Caribbean. 

[00:59:40] And commercial borrowings lack because the Caribbean governs themselves lack when it comes to data, when it comes to human capacity, when it comes to even having audits in treasury, have it happened in many years in Caribbean. So I do think there the risks there and because (inaudible) Caribbean are fairly, some are fairly unaccountable, at least there are three I'm thinking of. This can persist for a long time. And it kind of fiscal improvements being subsidized by easy money is again, not a very good combination, right? 

[01:00:12] Federico Sequeda: Yeah. It's actually a very interesting take that it's the lack of commercial borrow that are allowing the, the Chinese, sorry, commercial lenders that are allowing that the Chinese lenders to go in.

[01:00:23] Rasheed Griffith: Yeah. But it it's the same. It's also the same issue of the concessionary finance. Right. You hear Arabic governments go land based the World Bank for, Hey, oh, you guys won't give us cheap money. But it's like. You know, in an economic position of word, Caribbean is there's no need for cheap money doesn't need to have commercially viral money, but they don't want to organize themselves in a way, you know, that's just the big difference.

[01:00:49] You said Barbados and Bermuda. Bermuda be able to raise a billion dollars but it feels like, and bar has to go complain the human can get cheap money. So I think that's the kind of real, weird situation in Caribbean that isn't, I think at least broad enough to why these alternative lending is kind of being so salient it last, like in just five years off.

[01:01:09] Federico Sequeda: Yeah, no, is a very, very good point. And, yeah, I agree that a lot of times what you need is, I mean, just to go back again to the policy point. I mean, if you have good policy, which includes also having good human resources in your public credit department. And good human resources in your planning department, so that, you know what you're gonna spend the money on, and you can clearly say, Hey, look, I'm putting in these solar panels, I won't need to buy expensive fuel oil.

[01:01:37] And that is a drag on the foreign exchange, that we need, this is a really great plan. I mean, I think those are the things that commercial lenders would certainly want to fund.

[01:01:50] Rasheed Griffith: Yeah. Do you think that is I guess a more, you as professional in any industry question, do you think that there should be more, let's call 'em activist hedge funds in small markets. You know, providing the liquidity foryou know, particular end. 

[01:02:06] Federico Sequeda: So, maybe I will reframe it. I think, I think it's very good to have, special or people they can be at different manager asset managers., They don't have to be at one. But people who specialize in different regions. And I do believe that a really important part of what asset managers do is ultimately allocate capital. Right? And so, you know, actually almost everybody in finance does this over some period of time, right?

[01:02:33] A bank will participate in liquidity or in maturity transformation. They will take in deposits, which are just essentially one day assets or liabilities, depending on your point of view. And they will transform that into five year assets or liabilities, which are loans.

[01:02:50] You take market makers at major Wall Street banks. They are providing liquidity too as well, but it's generally very, very short term, right? They, they, you want to sell something, they will buy it for you. And they're looking to sell it to somebody else over one day. And the sort of liquidity transformation and maturity transformation and capitalization that we're doing is we're taking the capital from very large holders of capital, such as insurance funds, pension funds and whatnot.

[01:03:18] And we're allocating them to other countries for, you know, I think I said at the beginning, a three to, a one to three year period, but would really love that to be a 5 to 10 year period. Now, to do that, though, and to do that properly, you do need people who are specialized in, in the different parts of the market.

[01:03:36] So you're not gonna be able to do that very well for the Caribbean if it's just somebody, if let's say, Bahamas knocks on, on your door tomorrow and says, Hey, I'd love to get a 250 million loan. It's unlikely that that person is going to be able to understand everything that needs to be understood in a very short period of time.

[01:03:57] Right. But if, if, if you're building out expertise in specific regions, then I, then, then I think that then I think that you can do that. Right. So yes. So, so there's the, the, the short version to answer, yes. I think that there should be, there should be more specialized pulls of capital. And, again, I think I, I mentioned the, the, the edge part before, too.

[01:04:17] It's, it's also really, really useful, you know, if, if, if you're, if you're sort of playing in, in the, in the room where there aren't that, that many other people, then it's more likely, I think that you, as an investor and your clients too will achieve a big, a big outcome. 

[01:04:32] Rasheed Griffith: Okay. Is there anything else we wanna cover as we come to end now? Is there anything we kind of missed or should have, you know, brought up that you want to?

[01:04:40] Federico Sequeda: No, you know, I think we actually covered all of the different points really, really well. You know, it was, it was always fantastic to talk to you about China and the Caribbean. And again, I've been listening to all the episodes the podcast, so very, very excited. And thank you once again for having me Rasheed. 

[01:04:57] Rasheed Griffith: Thank you so much for come on the show today. I had a really enjoy..

[01:05:00] Federico Sequeda: Same here.

[01:05:01] Rasheed Griffith: ..Conversation.