Keith Collister, Contributor
COLLISTER
GLOBAL INVESTMENT Bank Bear Stearns released a new research piece on Jamaica on June 1. In its sovereign credit update, written by their lead economist Dr. Carl Ross, Bear upgraded its recommendation on Jamaican debt to outperform from market perform.
It is unlikely to be coincidence that this very detailed research piece was written exactly one week after the Jamaican Government successfully raised US$300m in the international capital market by way of a new 10-year United States-denomi-nated eurobond, originally priced to yield 9.125 per cent with a nine per cent coupon.
In his piece, the primary reason Dr. Ross gives for the outperformance of Jamaican debt prices compared with its regional Caribbean and Central American peers is what he describes as "a relatively strong economic policy consensus in the country that has contributed to high local and business and investor confidence."
Ross correctly observes that foreign investors are neither big speculators in the Jamaican dollar, nor significant investors in local instruments, and that Jamaican foreign currency debt is owned mainly by Jamaicans.
MONITORING
He argues that local market confidence is critical to the Jamaican credit outlook, and states that Bear monitors the key domestic financial variables including the J$/US$ exchange rate, the local stock market and local interest rates for signs of nervousness. On the basis of this monitoring, they "are fairly comfortable in saying that local market confidence remains fairly robust."
Dr. Ross clearly believes that strong local market confidence is the answer to what he describes as "the enigma" of why the financial variables, including the prices of Jamaica's external bonds, were negligibly affected by Ivan, Jamaica's most destructive hurricane in over 15 years. (I would note in passing that a similar, albeit, much more destructive event in Grenada, led directly to their default). In his view, the calm reaction of the local market to this event is even more surprising when one considers that 'the Government has missed its fiscal target in two of the past three years', and that 'in Fiscal Year 2003/2004, the fiscal target was met by a forward sale of the future payments due from the buyer of the failed National Commercial Bank'.
He believs this calm local market reaction is due to three main factors.
Firstly, he argues that the Government has been publishing a set of medium term macroeconomic targets that are broadly agreed with the IMF in the
context of Jamaica's enhanced surveillance agreement with that institution, and that the medium-term commitment explicit in the targets provides an important anchor for investor expectations.
BALANCING THE BUDGET
Secondly, he strongly emphasises the importance of balancing the budget, stating that "while the targets are revised from time to time based on shocks and other realities, the one target that has remained steadfast and consistent is the Government's balanced budget target for Fiscal Year 2005/2006", a statement which appears to somewhat diminish the importance Dr. Ross ascribes to the overall macro framework in favour of the key balanced budget objective. He further underlines the importance of this objective by saying that "local expectations have been adjusted to accept it as virtually non-negotiable" and that "the market was willing to absorb some fiscal slippage in Fiscal Year 2004/2005 as long as the fiscal year 2005/2006 budget target remained."
He argues the need for this austerity is due to the financial crisis, and what "was basically a severe case of fiscal slippage in the Fiscal Year 2002/2003." He argues that "when the market realised the extent of the fiscal slippage sometime in the spring of 2003 the market reacted accordingly", a delicate way of commenting on the period of currency weakness and sharply inflated interest costs, which rose by 2.9 per cent to 17.8 per cent of GDP, consuming nearly 60 per cent of government revenues.
His third key point is that "There is a relatively broad-based spirit of burden-sharing and policy consensus in the country", and cites the formal Memorandum of Understanding (MoU) signed in the beginning of 2004 as being the catalyst that positively changed Bear's view of Jamaica at the time. While he incorrectly ascribes the private sector organisations as being signatories to this MoU in addition to the Government and unions, this mistake is understandable as he would have been very familiar with the key role of the private sector in helping forge the positive policy consensus in 2004, which did so much to improve local investor confidence and allow the reduction in interest rates.
KEY BUILDING BLOCK
The private sector, in fact, regards this MoU as a key building block on the road to the wider partnership that the Prime Minister announced would shortly be completed in his budget speech.
Dr. Ross rightly highlights the much more favourable recent trends in fiscal policy, particularly the fact that the Government will spend nearly seven per cent less of GDP on wages and interest costs in Fiscal Year 2005/2006 than in the previous year, a direct result of the MoU and the massive decline in interest rates that has taken place since what he describes as "the abrupt tightening in mid 2003." He also comments on our tax reform,"The Government is focusing its efforts on tax simplification and the reduction of tax evasion, both of which are related."
VERGE OF A FOREIGN DIRECT INVESTMENT BOOM
Finally, he argues that faster economic growth is key to improving the debt ratios and setting the Jamaican economy and society on a more sustainable path, as the average over the last five years of 1.4 per cent is clearly insufficient.
He argues that the economy is on the verge of a foreign direct investment boom, and therefore that the projection of three to 3.5 per cent growth over the next three years is understated, and that Bear believes Jamaica could see growth rates of five per cent or above clearly this would be very good news.
In conclusion, over the past year and a half particularly, I believe Bear's research has been consistently more accurate on Jamaica than most of the other major international banks and rating agencies. I believe this is because unlike the majority of their peers they have fully understood the importance of local investor confidence, and have spent the time to understand and monitor the local financial markets.
