Minister of Finance and Planning, Omar Davies (left), speaks with Keith Duncan (centre), president and chief operating officer of JMMB Ltd, and Dr. Carl Ross, senior managing director and head of Emerging Markets Fixed Income Research at Bear Stearns and Co. at the JMMB EconoMix 2005 'Outlook on the Jamaica, Trinidadian and International Capital Markets' at the Knutsford Court Hotel, New Kingston, in May. - RUDOLPH BROWN/CHIEF PHOTOGRAPHER
Keith Collister, Contributor
ONLY A couple of years ago, after a very substantial budget overrun following the general election in the preceding year, the international financial markets became very concerned that Jamaica might default on its debt.
This concern, coupled with the fears of local investors about the domestic financial sector, was a major contributing factor to the currency crisis which occurred at the time. It appeared that the traditional high interest rate medicine used by the Bank of Jamaica to defend the currency had ceased to work, as investors questioned how long these measures could be sustained in view of their negative impact on the budget. In short, we seemed to be in a vicious circle.
Currently, international investors' view of Jamaica appears to be quite different. Today, a U.S. $250 million Jamaican Eurobond will be repaid without a ripple in the international financial markets, as its repayment had already been pre-funded last month by a very successful US$300 million (originally US$200 million) bond offering. The interest rate or coupon of this offering of nine per cent is significantly below the coupon rate of 10.875 per cent of the issue it is replacing, thereby reducing our interest costs.
GREATER ACCEPTANCE
This greater acceptance of Jamaican debt internationally is at least partially due to increasingly successful "investor relations" exercises by the Ministry of Finance, such as the one that preceded the bond issue. For example, on Wednesday, May 18, Finance Minister Omar Davies made a presentation at the Bear Stearns Fourteenth Annual Global Credit Conference held at leading New York hotel, the Waldorf Astoria. Jamaica was one of only four countries, the others being Mexico, Colombia and the Dominican Republic, that presented at this huge conference, which mainly targeted United States institutional investors (pensions funds etc.) interested in higher yielding debt. The minister followed this up with another presentation to international investors at Swiss international investment bank UBS's emerging market conference in Miami.
According to Dr. Carl Ross of Bear Stearns, Jamaica may also be benefiting from a trend whereby 'crossover investors' e.g., institutional investors such as the state pension fund of North Dakota or Alabama, who have not traditionally invested in emerging market debt, seek higher yields in emerging markets than those available in U.S. Govern-ment paper.
These presentations, and the lunches and conference calls in between, were the necessary preliminary to Jamaica's bond issue a week later on May 25, which was four times oversubscribed at over US$800 million. While no Jamaican investors were allowed to buy into the initial offering, 133 international investors from 20 different countries: Argentina, Austria, Barbados, Belgium, Bermuda, Brazil, Cayman Islands, Chile, Costa Rica, Denmark, France, Israel, Italy, Singapore, Spain, Switzerland, Trinidad and of course the U.K. and the U.S. purchased bonds, the widest ever range of investors for a Jamaican overseas issue. Half of the investors were first-time investors in Jamaican U.S. dollar denominated bonds, with a quarter of the investors being entirely new to Jamaican debt. This is a huge contrast with the 2017 bond issue reopened by Bear Stearns about one year ago, in which only 20 investors participated.
INTERNATIONAL MARKET DEBT
As a result, Jamaica was able to issue international market debt at nine per cent, its lowest coupon rate ever, which local economic analyst Jason Morris believes shows that "we have moved beyond mere economic stability towards the path of economic acceleration."
Colin Steele, respected local financial analyst and chairman of the cconomic policy committee of the private sector organisation, concurs.
"The prospects for stability are even stronger as in order to meet the country's borrowing programme only US$200 million is required for the remainder of this year, and in the next four years a total of only US$870 million of external debt matures," Mr. Steele said. "Given an NIR of US$2000 million and Jamaica's improved prospects due to strong Foreign Direct Investment, there is very low risk of instability in the foreign exchange markets as concerns about the country's ability to meet its borrowing needs in the medium term should be minimal or non-existent."
He adds that, "The international capital markets have rewarded Jamaica for our fiscal prudence. The rate at which we borrow internationally provides a floor beneath which local interest rates are unlikely to fall. This lower rate, therefore, allows for further sustained reductions in local interest rates and as a result one can project lower Government borrowing costs which will allow for greater non-debt expenditure in the future."
Daniel Hewitt, Senior International Economist for the Alliance Fixed Income Fund, was one of the international investors who interviewed Minister Davies on his New York trip. Although he describes himself as a hard nosed sceptic, he said, " I was mainly impressed by three things. Firstly, the team had done their own analysis of the level of primary surplus - 13-14 per cent of GDP - required to stabilise Jamaica's debt, and their numbers agreed with mine. Secondly, although maybe they need to put a contingency for hurricanes in the budget, they had largely done what they said they were going to do in terms of last year's fiscal deficit. Thirdly, they had achieved a memorandum of understanding with the Unions, and there was a prospect of an all important wider social partnership."
Mr. Hewitt had first become interested in Jamaica's story in early 2004 when he met with a private sector group that, as part of Jamaica's Partnership for Progress initiative, had attended the Bear Stearns Conference in Miami. As he put it" I learned that as part of the Partnership for Progress, Jamaican financial sector groups had discussed offering a debt swap to the government whereby they would extend the maturity of their holdings. However, with improved confidence, interest rates fell so much that the swap no longer made any sense. The idea of the swap was to improve confidence. The Partners for Progress managed to achieve that without the swap."
He advised he had been 'very impressed' by this message of private sector support for the Government offered by the group, to the extent that he had subsequently looked into the Irish experience that had provided much of the inspiration for the Jamaican initiative.
European based hedge fund analyst (and former IMF economist) Frank Engels also acknowledged the importance of the Partnership for Progress initiative in moving Jamaica from a vicious to virtuous circle when he observed that, "the success/failure of the government's program hinges very crucially on the trust of the local business and financial sector in the government's ability to carry on with its austere macropolicies and to negotiate a new tripartite memorandum of understanding".
The benefits our current austere policy, Mr. Steele said, are that, "Generally, lower interest rates and greater stability will encourage longer term investments, benefit the real sectors, foster growth and result in improvement in real estate prices as well as both private and public company values."
International economist Geoffrey Bell, who has been advising the Jamaican Government since it first tapped the international bond market in 1997, says international interest in Jamaican debt has been growing strongly of late making Jamaica 'flavour of the month'.
He adds, "Jamaica has continued to perform in an exemplary fashion and as Jamaica moves to a balanced budget, Standard and Poors and Moodys should, and probably will, raise Jamaica's credit rating so continuing the virtuous circle of falling interest rates."
