Ashford W. Meikle, Staff Reporter
LAST WEEK, the Ministry of Finance closed - a day earlier - its Government of Jamaica's U.S. dollar denominated local bond owing to an overwhelming demand from the public.
The US$150 million bond has a fixed interest rate of 8.125 per cent and will mature on September 29, 2010, with interest payments made twice yearly.
Wednesday Business spoke with a number of analysts and finance personnel to explain the reasons for the overwhelming demand for the instrument.
"It boils down to two things: a scarcity of U.S. dollar instruments and high U.S. dollar liquidity. There has been a lot of U.S. dollar instruments maturing. No new instruments have been issued since August last year so there is a lot of liquidity in the market," said research manager at First Global Financial Services, Dean McDonald.
Another financial analyst, who requested anonymity, supported Mr. McDonald's arguments.
GLOBAL BONDS
"A lot of people have U.S. dollars sitting around. And compared to previous yields it is a significant drop, although it is on par with global bonds," said the analyst.
"It was priced compared to a similar rated Euro bond. These kinds of U.S. dollar instruments were few in the market," said senior investment analyst at JMMB, Jason Morris.
Continued Mr. McDonald, "It's a reflection of the market's appetite for U.S. dollar instruments. If you look at the pressure on our currency, the Jamaican dollar has been weakening against the U.S. dollar."
According to Mr. Morris, the over subscription of the bond "means that it's good news for the Government. It means that it has no difficulty in rolling its domestic obligations. When debts are maturing you need to issue new debts to honour fiscal responsibilities."
He argues, "International credit agencies are looking at this. It speaks to our ability to roll debts. It's positive for the government if you have difficulty in rolling your debts it speaks to serious issues [relating to your] liquidity and credit rating. The fact that they rolled it far lower than the previous bond is a good sign."
MEDIUM-TERM STRATEGY
Said Mr. McDonald, "It's a reflection of the Government's commitment to reducing debt, which stems from its medium-term strategy to have a balanced budget."
Still, while acknowledging the success of the bond, Mr. Morris said: "We haven't had a liquidity problem since 2003. What we should be more concerned about is the macroeconomic performance in the second half of the fiscal year. The economy underperformed [vis-à-vis] the GDP projections."
Both individuals and corporations snapped up the instrument. Explained Mr. Morris: "Basically all and sundry [especially] those who have U.S. dollar liabilities, people who hold bonds that are maturing, portfolio managers. For the latter, when you find one security maturing, then you need to find a similar instrument."
At the same time, he cautioned that the U.S. dollar denominated bond was not for everyone. "If you are an ordinary individual - separate and apart from diversification and unless you have no liability in U.S. currency - it makes no sense to go and invest in U.S. dollars if you are looking for protection from inflation."
He added, "The currency market [as it is now] does not protect you from inflation."
