Jamaica Debt Management Strategy Currency Risk

Document Sample
Jamaica Debt Management Strategy Currency Risk Powered By Docstoc

               Country Report

     Commonwealth Seminar
       on Debt Negotiation

Prepared by:   Cheryl Lewis
               Leah Bobb-Semple

The Public Debt1

At the end of March 2006, total public debt stood at $847.3 billion. This represented an
increase of 11.5% over the stock of $759.7 billion recorded at the end on March 2005.
The Debt-to-GDP ratio stood at 131.5% at the end of FY2005/06, an improvement over
138.2% recorded at the end of the FY2004/05 and 140.0% at the end of FY2003/ 04.

The stock of public and publicly guaranteed external debt stood at $364.6 billion
(US$5,567.4 million) at the end of March 2006. This represented an increase of 17.5%
compared with the stock of $310.4 billion at the end of March 2005. In US$ terms, the
external debt rose by 10.4% from US$5,044.44 at the end of March 2005. The increase
in Government-guaranteed external debt mainly reflected borrowings in support of the
financial restructuring by the national airline, Air Jamaica Ltd., and for infrastructural
development by public sector entities such as the National Water Commission.

Central Government external debt increase from $278.0 billion (US$4,517.5 million) at
the end of March 2005, to $316.1 billion (US$4826.3 million) at the end of March 2006,
as new borrowings exceeded amortization.

Central Government domestic debt stood at $482.7 billion at the end of March 2006.
This represented an increase of 7.4% compared with the stock of $449.2 billion recorded
at the end of March 2005. The main factors accounting for the increase were the
issuance of securities by the Bank of Jamaica (BOJ) representing capitalization of
accrued interest on BOJ losses and BOJ/Financial Sector Adjustment Company Local
registered Stocks (LRS), the additional requirements for the fiscal operations and the
assumption of debts on behalf of certain public sector entities.

The rate of growth of the domestic debt has recorded a significant decline over the last
five (5) years, moving from 39.6 % in FY2001/02, 14.0% in FY 2003/04, 7.6% in
FY2004/05 to 7.4% in FY 2005/06. The Domestic Debt-to-GDP ratio declined from
81.7% at the end of FY2004/05 to 74.9% at the end of FY2005/06.

Debt Management Strategy2

The policies and strategies implemented over the years have been designed to return
the public debt to sustainable levels and to implement prudent debt practices (“the
Strategy”). The current debt management objective is:

        “To raise adequate levels of financing on behalf of the Government of Jamaica at
        minimum costs; develop and implement strategies to ensure the long term
        sustainability of the public debt to reduce the Government’s exposure to risk.”

       Maintain a prudent debt structure by:

  Informat ion extracted fro m Min istry Paper #15 “ Debt Management Strategy FY 2006/2007” Ministry of
Finance & Planning, April 27, 2006

               -   Maintaining an appropriate mix of fixed-rate and floating-rate debt to
                   further diversify and minimize interest-rate risk;
               -   Extending and smoothing the maturity profile of the debt to better manage
                   refinancing risk; and
               -   Minimizing foreign currency risk.

      Further diversify the debt portfolio;
      Use market mechanisms for domestic debt issuances;
      Increase the transparency and predictability of primary market debt issuance;
      Promote and build a liquid and efficient market for government securities.

Given the dynamic nature of the macro-economic environment the Strategy is kept
under constant review.

Significant progress has been made over the eight (8) years since the implementation of
the Strategy. The debt portfolio has been progressively realigned by:

       (i)         extending the maturity profile;
       (ii)        effectively managing interest rate risk, thereby reducing the vulnerability
                   to unexpected interest rate shocks;
       (iii)       diversifying the investor base (both domestic and external), instrument
                   type and market sources;
       (iv)        promoting and facilitating the development of the domestic capital market;
                   and increasing transparency and predictability in debt management
                   practices and operations.

The formulation and implementation of the Strategy has had a positive effect on
Jamaica’s image and strengthened its credibility in debt management. This has
contributed to increased investors’ confidence as well as that of the rating agencies and
international financial community in general. All of these factors have had a positive
influence on the pricing of the country’s debt securities.

Debt management in FY 2005/06 was challenged mainly by:

       (i)         the requirements for additional financing to meet the revenue shortfall
                   arising mainly from the impact of an unusually active hurricane season;
       (ii)        the reluctance among investors to invest in long term securities in light of
                   the higher than projected inflation which contributed to expectations for
                   higher interest rates. The demand was therefore for high fixed-rate
                   securities and/or some investors opted for variable-rate instruments.

During FY2005/06 the Government made some progress in executing its Debt
Management Strategy. The Government,

      was successful in extending the maturity profile of the domestic debt in
       FY2005/06 despite the challenges of the market.
      took advantage of strong market conditions and low long-term interest rates in
       the international capital markets and accessed the long end of the US$ yield-

       continued to make significant progress in reducing the foreign currency exposure
        of the domestic debt portfolio towards the internationally acceptable standard of
       continued its market oriented approach to debt management by actively
        engaging the local and international financial communities in dialogue through
        various media, such as press conferences, meetings, investor for a and
        presentations, as well as quarterly conference calls.

Debt Relief and Development Aid Delivery3

Jamaica has been the recipient of debt forgiveness from its bilateral creditors under
various debt initiatives. The objective of these initiatives is to alleviate the debt burden.
In March 1990, the Government of Canada wrote –off all CIDA loans amounting to
C$93.70 million. The Netherlands wrote off debt service payments falling due in
calendar years 1999-1995, 1999-2000 and 2004.

As part of the Enterprise of Americas Initiative (EAI), the United States restructured its
PL480 loans in 1991 and USAID loans in 1993. Under the Agreement, 80% of PL480
and 70% of USAID have been forgiven (for a total of US$ 310 million) with the remaining
debt rescheduled under a new EAI. Jamaica signed a framework agreement as required
under the EAI. Under this Agreement interest on the EAI is deposited in local currency
into the environmental fund.

Additionally Jamaica has received debt relief from the United Kingdom under the
Commonwealth Debt Initiative (CDI) for fiscal years 1998/99, 1999/2000 and 2000/03 in
the form of debt write-offs. For fiscal years 2000/03 the total written off amounted to
GBP11.4 mn. The savings in debt servicing emanating from these initiatives were
diverted to the education sector specifically the primary, pre-primary and primary all age
sub-sectors. The capital base of the Urban Renewal Trust was established with funding
under the CDI, and the income generated from this capital was used to support small
community projects in poor inner city areas.

For fiscal year 2003/04 the Government of the United Kingdom provided debt
forgiveness to the value of ₤2.1 million under the renewed Commonwealth Debt Initiative
(CDI). This amount covers principal and interest payments falling due on eligible loans
during the fiscal year. Jamaica was granted this debt forgiveness having satisfied the
CDI criteria and in recognition of its commitment to the internationally agreed Millennium
Development Goals and policies promoting transparent and accountable government,
and economic policies that promote sustainable development. The funds were used to
support the Government’s budgetary programme.

 During FY 2004/05, the Government of the United Kingdom provided debt forgiveness
to the value of ₤9.4mn under the renewed Commonwealth Debt Initiative (CDI). This
amount covered principal and interest payments amounting to ₤3.5mn due on eligible
loans from the Government of the United Kingdom and ₤2.9mn due on eligible loans
from the Commonwealth Development Corporation (CDC). The remaining ₤3.0mn

 Informat ion extracted fro m Min istry of Finance & Planning’s “Debt Relief and development Aid
Delivery” paper.

represents a reimbursement of payments made to CDC during FY 2003/04. These funds
were used to assist the Government in addressing growth and poverty reduction

The Netherlands Government provided debt relief in the amount of €5.1mn representing
principal and interest payments due on eligible loans in calendar year 2004.

The United States Government also provided cash flow relief amounting to US$6.5mn
by way of a debt for nature swap under its Tropical Forest Conservation Act Programme.
Under this programme, Jamaica is permitted to utilize debt payments to the United
States Department of Agriculture to the establishment of endowed trust funds to finance
the protection of tropical forests and other environmentally significant areas.

Loan Repayments

Jamaica has not faced debt repayment difficulties. In the international capital markets,
Jamaica’s sovereign credit ratings were re-affirmed by Moody’s Investors Service and
Standard & Poor’s.4 In FY2005/06 the Government took advantage of the investors
confidence, strong market conditions and low long-term interest rates in the international
capital markets and accessed the long end of the US$ yield-curve. This was
accomplished by the issuance of a 20-year and a 30-year global bond during the fiscal

In May 2005, Jamaica made its final debt payment to the International Monetary Fund
(IMF), thereby ending almost three decades of borrowing relationship with that

Loan Agreements

Generally loan agreements that are reviewed by the Attorney General’s Chambers are
properly drafted. Loan Agreements, especially if the creditors are commercial banks,
tend to be on strict commercial terms and the terms are for the most part designed to
protect the creditor. From time to time there may be concessionary loan arrangements
in the form of a moratorium on interest payments. These are rare and are often
Government to Government transactions involving special projects.

However, on reviewing the loan documentation the Attorney General’s Chambers
usually highlights unfavourable and onerous terms and conditions and advise the
Ministry of Finance & Planning accordingly.

  In May 2005, Moody’s affirmed Jamaica’s “B1” status for long term foreign currency rating and a
“Stable” outlook. In January 2006, Standard and Poor’s reaffirmed it “B” long and short -term rating and
“Stable” outlook. Ante note1