Davies
THE GOVERNMENT has raised just about $2.5 billion from last week's issue of a US-dollar indexed bond, much less, according to dealers, than the anticipated intake of funds sought to help finance the island's budgetary requirements for the 2003/2004 financial year.
The value of the bonds issued from the unlimited offer was about 45 per cent less than the funds raised in a relatively less attractive offer a month before, despite the longer tenure of the latest offer.
Money market players believe the bond offer did not attract as many investors largely because of pre-budget jitters, as well the uncertainty in the domestic economy. The more attractive Bank of Jamaica (BoJ) reverse repurchase instruments apparently also accounted for the loss of interest in the bonds, as has been the global economic outlook as a result the United States-led war in Iraq. All of those factors have combined to induce investors to hold on to their hard currency, according to money market players.
Over the period April 2-4, the Ministry of Finance and Planning offered an unlimited amount of taxable US-dollar indexed bonds with a tenure of 30 months and yielding interest of 11.625 per cent.
LIQUIDITY
However, according to one analyst at Mayberry Investments, the US$46.71 million or about J$2.5 billion took in by the Government from the issue was not nearly enough. "There's a lot more liquidity in the system they could have accessed, but investors are just not interested in tying up their funds for that long, even if there's a hedge effect in US dollars," he said.
Furthermore, investors are wary going into the budget debate and not knowing how the Minister of Finance is going to raise the bulk of the funds needed to finance the budget, the analyst said.
"People are staying in the shorter term instruments, such as the 30, 60 and 90-day repos," he said. "It's hard to convince them to go long because they don't want to tie up their funds for even a year." However, the analyst said it was not just pre-budget anxiety that was influencing investors' thinking. "Not many people have confidence in the economy at this time," he said, and therefore prefer to retain their US dollars.
Moreover, on the last day of the issue, the market received a warning from Bear Stearns, cautioning investors to steer clear of Jamaican Government debt instruments, and this also served to keep investors away.
The Ministry of Finance and Planning said this week that it was aware of the Bear Stearns warning, but declined further comment.
WORST PERFORMER
According to the Bear Stearns report, a copy of which has been obtained by the Financial Gleaner, Jamaican debt was the worst performer by far in its index of 10 Caribbean and Central American countries for the month of March, as prices have reacted to the distressed economic conditions.
"Even at the current repriced levels, we still cannot recommend Jamaican bonds until we see more clarity on the prospects for turning around the public finances," said the report, released on Tuesday.
In noting that on April 3, the Ministry of Finance tabled the estimates of expenditure for the fiscal 2003/2004 budget, Bear Stearns said interest payments on debt are scheduled to increase by 25 per cent over the last fiscal year because of a combination of higher-than-expected interest rates, a weaker Jamaican dollar and higher debt stock resulting from the higher-than-expected fiscal deficit.
Bear Stearns did not mention the specific level of fiscal deficit on which it based its recommendations for Jamaican debt. However, when Finance and Planning Minister Dr. Omar Davies outlines measures to finance the budget on Holy Thursday, April 17, he will tell the country that the outturn for the deficit will be 7.9 per cent - lower that the 8 per cent anticipated when he tabled the Supplementary Estimates - giving credibility to the Government's intention to reduce it to a more sustainable level.
However, Bear Stearns added that in an effort to maintain fiscal control, the budgets of health, education and national security were being slashed in real terms.
TAX INCREASES
"While we have to wait until April 17 to see the revenue side of the budget, it seems almost certain that significant tax increases will be needed to reduce the deficit by at least two per cent of GDP, which the Government has said it wants to do," the report said.
It also noted that the BoJ raised interest rates twice in March - to correct the instability in the foreign exchange market - and that one year rates are now in the range of 35 per cent, compared with inflation at eight per cent. "This is clearly an unsustainable situation," said the Bear Stearns report, adding, "yet Jamaica has surprised us in the past with ability to muddle through - from a public policy and economic perspective."
In January, this year, Bear Stearns announced that Jamaica was among 10 Caribbean and Central American emerging markets whose international debt it would track on a monthly basis, using its Bond Index (BSCAX).
MILD APPRECIATION
And Vivian Bedassie, senior equities trader at Edward Gayle & Company, also said investors were comparably less interested in last week's bond offer, although "it was fairly successful in bringing about a mild appreciation of the Jamaican dollar" against its United States counterpart.
Still, investors preferred to hold their US dollars because of uncertainty about next week's budget presentation and the uncertainty in the world economy, he said. Potential investors also felt the tenure of the bond was too long, said Mr. Bedassie, adding that most people preferred to stay in the shorter term instruments.
The BoJ's hike in interest rates two weeks ago was also seen as a factor in the lack of interest in the taxable indexed bond, which matures in October 2005.
Last week's issue was partly influenced by a successful issue in March when the Government raised $5.7 billion from a 10.50 per cent 15-month offer. With the US$46.71 million raised last week, the Government's total US-dollar indexed bond obligation now stands at US$799.16 million.