In his Budget Presentation, Finance and Planning Minister Dr. Omar Davies tabled a Ministry Paper outlining the Government's plan to deal with the country's massive debt during the financial year. Today, we publish the third section of this Ministry Paper.
AS IN previous years, the primary objective of the financial year 2002/2003 debt management strategy will be to minimise debt service costs and to reduce the overall debt burden. In addition, a key strategic objective during FY 2002/03 will be to foster the further development of a well-functioning domestic debt market, the benefit of which should be lower costs.
Building on the approach adopted in FY 2001/02 and consistent with the core debt objectives, the debt management strategy to be implemented in FY 2002/03 will seek to:
Maintain a prudent debt structure;
Further diversify the debt portfolio;
Increase reliance on market-determined instruments for domestic debt issuance;
Promote and build a liquid and efficient market for government securities;
Increase the transparency and predictability of primary market debt issuance.
MAINTAINING A PRUDENT
DEBT STRUCTURE
Given the size of the debt stock, a key component of the debt strategy has been to ensure the most prudent debt structure in terms of composition and maturity. The Government will therefore seek to borrow using a variety of instruments and a range of maturities to minimise costs and limit the risk to the debt portfolio arising particularly from currency and interest rate movements.
INCREASING THE SHARE OF FIXED-RATE DEBT
Interest costs absorb a significant portion of the Government's budgetary resources. In FY 2001/02, total interest payments accounted for 46.5 per cent of total Government revenue, up from 39.6 per cent in FY 2000/01. Reducing interest costs and ensuring the predictability of interest payment amounts by increasing the share of fixed-rate domestic debt is foremost among the debt strategies to be implemented in FY 2002/03.
The high level of variable-rate domestic debt makes the portfolio sensitive to movements in interest rates. Over the medium term, the Government will maintain the fixed-rate target of 60 per cent of the domestic debt portfolio, in keeping with international best practice. The Government is cognizant of the trade-off between risk and cost minimisation and will therefore review the target annually to ensure an optimal distribution.
EXTENDING THE MATURITY STRUCTURE OF THE DEBT
Efforts will continue to lengthen the maturity profile of both the external and domestic debt during FY 2002/03. As in FY 2001/02, extending the maturity profile of the domestic debt will be achieved primarily by issuing longer-term LRS with a concentration of issues with maturities of 7 years and over.
The debt strategy for FY 2002/03 is to increase the number of offers of LRS with maturity of 10 years and over and increase this share of LRS issues to 20 per cent of the domestic debt stock by the end of FY 2002/03. Longer-term issues will allow for the achievement of a more balanced maturity structure and therefore reduce the risk associated with shorter maturities of rolling over the debt under adverse interest rate conditions.
Following the successful issuance of long-term bonds in the international capital markets in FY 2001/02, market conditions prevailing, the Government will continue its efforts at extending the maturity profile of the international capital market bond issues.
MINIMISING
CURRENCY EXPOSURE
Management of the debt portfolio's currency exposure will focus primarily on two areas; on the external side, minimising the non-US dollar currency risk; and on the domestic side, limiting the share of US dollar exposure in that portfolio.
The Euro, the second largest currency in the external debt portfolio, accounted for 14 per cent of the total currency share at end March-2002. The conversion of several European currencies to the Euro and Jamaica's issuance of Euro-denominated international bonds have resulted in a significant increase in the Euro's share of the portfolio. While movements in the Euro vis-a-vis the US dollar have generally been favourable during FY 2001/02, the Government will take steps to ensure that it minimizes the portfolio's vulnerability to possible adverse movements in the Euro in the future. The strategy for FY 2002/03 will therefore be, to use, where appropriate, hedging mechanisms to minimise the Government's foreign currency exposure.
The issue of both US$-denominated and US$-indexed securities in the domestic market has led to an increasing share of the domestic debt portfolio being exposed to US dollar currency risk. At end-March 2002, these categories together comprised 15.4 per cent of the domestic debt compared with 8.1 per cent at end-March 2001. While the Government is committed to providing an array of instruments to the domestic markets, maintaining a prudent domestic debt structure requires that the US dollar exposure of the portfolio remains low.
Consistent with this, the Government will seek to reduce this exposure to 14 per cent by the end of FY 2002/03 and thereafter gradually reduce the US dollar exposure to a maximum of 10 per cent of the domestic debt by the end of FY 2004/05.
DIVERSIFYING THE
DEBT PORTFOLIO
The Government wishes to ensure that it has access to a wide range of sources for its domestic and external financing needs to keep debt servicing low and to maintain a diversified investor base.
