By Al Edwards, Business Co-ordinatorPRICES FOR Jamaica's international bonds continue to nose-dive amid credit rating agencies and leading finance houses expressing concerns over the country's finances.
On Wednesday, the London Financial Times reported that "Jamaica, which is spending 65 per cent of its budget on debt service this year, has seen the interest on its external debt soar from about 11 per cent to 13.5 per cent in the past couple of weeks. Prices have fallen from about 105 cents on the dollar to about 88 cents."
It went on to say that "earlier this year, the Jamaican Government failed to refinance an expiring bond and market sentiment has since deteriorated sharply. Meanwhile, it has become clear that the state of Jamaica's public finances is worse than expected and the country's currency has taken a heavy hit."
However, a local money market operator did not place the Eurobonds in as bad a predicament, citing the 2005s at 97 cents, 2007 at 98, 2011 at 93.5, 2017 at 83.5 and 2022 at 91 cents.
BEYOND CONTROL
An analyst working for Barclays Bank told the Financial Gleaner that Jamaica's debt burden was now beyond the control of the Government and with the country's debt amounting to 152 per cent of Gross Domestic Product (GDP), the Government will need to hold in its stomach and tighten its belt.
Minister of Finance, Dr. Omar Davies has said that "our international bond amortisation schedule is well distributed over the coming years. In addition, Jamaica has ample international reserves totalling US$1.4 billion, which is high for an economy our size and relative to our external debt obligations." However, the Net International Reserves (NIR) has fallen steadily from about US$2 billion a year ago to around US$1.3 billion today.
It was not all doom and gloom as far as Jamaica was concerned. Bear Stearns assessed the budget as being better than expected. In a document released earlier this week, the renowned financial institution said:
"The Jamaican budget for fiscal 2003-04 is a very reasonable compromise between raising much needed revenues and maintaining social and financial stability. New tax measures are tilted towards increasing the tax base, rather than increasing tax rates, which is positive.
The budget also demonstrates the extreme debt service burden faced by Jamaica, in the form of both interest costs and amortisations due for refinancing. Standard & Poors and Moody's have both moved to negative outlooks on the credit.
Our worst fears - that possible social upheaval and chaos could result from the budget outlook now look overstated.
We believe that Jamaica is still not out of the woods in terms of its debt dynamic. We continue to remain very cautious on Jamaican debt. However, with the bonds having reprised significantly this year, we are currently much more comfortable recommending moderate positions than we were at the beginning of the year."
REVENUES
The report noted that the country is extracting more and more out of the economy, placing total revenues as high as 33.8 per cent of GDP in fiscal 2002-03 compared with 25.4 percent in fiscal 1997-98.
It said there are two main sources of increase in fiscal revenues for this year's budget. The first is a broadening in the base of the General Consumption Tax (GCT) to include many currently exempted items. Importantly, food items currently exempt will continue to be exempt, which should reduce the impact on the lower-income sector of the population. This base change accounts for 59 percent of the new tax revenues.
The second major tax initiative is a four per cent cess on all imports, including intermediate and capital goods. This tax would be deductible from income taxes, so in effect it is an advance on income taxes. It is also a tool for luring importers into the tax net. In theory, this tax should be relatively easy to collect, since there are only a limited number of ports of entry into Jamaica.
BEAR VIEW: "We believe that, in nearly all cases, raising taxes is not a solution. With Government expenditures accounting for nearly 40 per cent of GDP, Jamaica's Government is already too big. However, Jamaica has a debt sustainability problem that is relatively acute and more revenues needs to be raised. These tax measures make sense, in our view, because they do not raise tax rates but instead broaden the tax base. As a result, the impact on economic behaviour is minimised. We also believe that these measures largely insulate the poor and are therefore as socially responsible as possible, given the circumstances. The taxes do not fall disproportionately on the financial sector, which needs to continue to roll over the domestic debt. We also believe that the infrastructure is basically in place to collect these taxes."
EXPENDITURES
According to Bear Stearns, current and capital expenditures are scheduled to be 39.6 per cent of GDP in fiscal 2003-04. About 46 per cent of total expenditures will be dedicated to paying interest on the public debt, which is an excruciating level of debt service. About one-third of expenditures are assigned to wages and salaries of public workers. This ratio has been consistent over time and is not particularly high by international standards. Programmes and capital expenditure budgets have taken the brunt of the adjustment, rather than wages and salaries.
BEAR VIEW: "To wipe out the fiscal deficit of 5.8 per cent of GDP slated for fiscal 2003-04, the public sector workforce would need to be nearly halved, or programmed spending would need to be nearly eliminated. Reducing capital expenditure to zero would make a relatively small dent in the deficit. The extreme lack of fiscal flexibility in the event of unforeseen events (from weather-related infrastructure damage to higher-than-expected interest rates) makes a strong case for rating downgrades from Moody's and Standard & Poors. Moreover, we are not sure that the interest rate assumptions in the budget are realistic. This is potentially significant, given that the fiscal programme already suffers from a lack of credibility after deviating drastically from the plan in the last fiscal year."
