By Al Edwards, Business Co-ordinatorTHE country's mounting debt continues to be a cause for concern with United States-based investment banking and securities firm, Bear Stearns, surmising that with public sector debt at 150 per cent of GDP, stabilisation of the debt ratios is not good enough.
Interest payments take up 47 per cent of total expenditure and 63 per cent of revenue. According to the PSOJ's Confidential Economic Bulletin, the widening fiscal deficit is now $20.6 billion, 4.9 per cent worse than budget.
Bear Stearn's senior managing director, Carl Ross, observes that Jamaica's debt-to-GDP ratio may have stabilised this year, due in part to inflation, moderate real GDP growth and continued vigilance on the fiscal programme.
"With public sector debt at 150 per cent of GDP, however, stabilisation of the debt ratio is not good enough. Jamaica, like other countries with very high domestic debt levels such as Brazil and Turkey, has been able to roll over this year maturities in the domestic market and regional (i.e. Trinidad) markets. The stock of government debentures and locally placed issues of U.S. dollar-indexed and U.S. dollar-denominated debt has increased sharply this year. International markets have not been accessed. Debt management in Jamaica has been strong under the circumstances. Evidence of this is relatively high average maturity of the public debt relative to other countries. Because of Jamaica's excellent debt service record, the Government has been able to issue medium to long term debt in the local market. The average maturity of the domestic debt is about 5.6 years, and that of the external debt is 8.1 years."
TAKING STOCK OF DEBT
There are a number of notable factors that must be borne in mind when taking stock of the country's debt. These are:
Domestic debt has doubled as a percentage of GDP since 1998, from 47 per cent to an estimated 94.1 per cent as of July 2003.
Since 2001, the government has sharply increased its issuance of US$-linked and straight US$ denominated bonds in the local market.
Debenture issuance has also increased dramatically since 2001, and currently accounts for 17.5 per cent of the domestic debt.
On the external debt side, there is positive news. The stock of external debt has actually declined since 2001, as the government has paid off more than it has received in new foreign financing.
Under the circumstances of a massive increase in public debt, the authorities have done an admirable job at debt management. The average maturity of the bond component of the domestic debt is 5.6 year, and that of the external debt is 8.1 years. This compares very favourably with highly indebted single-B sovereigns such as Brazil and Turkey.
CAUSE FOR CONCERN
The fiscal trends are a cause for concern, particularly as the size of government has grown alarmingly in relation to GDP. Since fiscal year 97/98, tax revenues have risen from 22.6 per cent of GDP to 31.6 per cent of GDP. Total expenditures have grown from 33 per cent of GDP to 39.6 per cent of GDP. The mix of expenditures has become much less healthy. Programme and capital spending combined have fallen by three per cent over the period. Wages and salaries have grown by two per cent of GDP, and interest charges on the public debt have risen by about 9 per cent of GDP. The interest bill of 25 per cent of revenues or expenditures is very high. Jamaica's public debt interest burden amounts to 18.3 per cent of GDP in this year's budget. To put this figure in context, Argentina has determined that from a political and financial viability standpoint, they can pay no more than three per cent of GDP on public debt interest.
Jamaica has been able to maintain outsized primary surpluses for several years. Since Fiscal Year 98/99, the average primary surplus has been over 10 per cent of GDP. Most countries consider four per cent of GDP to be very high (i.e. Brazil, among others).
Maintaining these primary surpluses will continue to be politically and economically difficult as it results in the need for constant vigilance on spending and an ongoing focus on figuring out ways to extract more tax revenue out of an already heavily taxed population (taxes are 31.6 per cent of GDP).
Carl Ross concludes, "We believe that Jamaica's debt crisis, if one occurs, will emanate from a breakdown of fiscal solvency (a la Argentina and Uruguay), rather than a breakdown in external liquidity (a la Dominican Republic). There are external liquidity risks, however. Foreign exchange reserves have been trending down this year, and the current account is in large deficit. The next external bond maturity comes due in August of 2004 (Euro175 million)."
