IMPLEMENTATION OF JDX BOLD MOVE IN 2010

BY: ALLAN BROOKS

Minister of Finance and the Public Service, Hon. Audley Shaw (right), greets the International Monetary Fund (IMF) Mission Chief to Jamaica, Trevor Alleyne, as he arrives for a press briefing regarding the review of the Stand-By Arrangement between the Government and the IMF, in May, at the Ministry of Finance and the Public Service, Heroes Circle.

Financial analysts have dubbed 2010 as historic and game changing in terms of Jamaica’s bold implementation of a debt exchange programme.

Prime Minister, the Hon. Bruce Golding in speaking of the country’s overall economic restructuring programme said: “The way forward is exciting. It will not be without its challenges, but if we make this fundamental shift in how we conduct our business, we will meet those challenges and we will be victorious. The pain of the present will give way to the promise of a brighter and more secure future.”

The Jamaica Debt Exchange (JDX) programme came against the background of a crushing debt burden and the vicious cycle of high fiscal deficits and low growth for a number of years. Jamaica’s debt-to-GDP (Gross Domestic Product) ratio has been well over 100 per cent and economic growth has been anemic.

Not only was the stock of debt high by world standards, but approximately 40 per cent of the domestic debt was maturing in less than 24 months, thus presenting significantly high levels of roll-over risk and leaving the Government vulnerable to sudden adverse shifts in the market. As a result, interest payments as a ratio of GDP tripled over the last 5 years, with interest payments accounting for 23.5 per cent of GDP at the end of 2009 and reflecting an average of 60 per cent of Government revenues annually.

Minister of Finance and the Public Service, Honourable Audley Shaw (second right), explains the factors behind Jamaica’s favourable performance up to March 2010, under the Stand-By Arrangement with the International Monetary Fund, at a press briefing at the Ministry of Finance and the Public Service, Heroes Circle, in May. Seated beside him are the International Monetary Fund (IMF) Mission Chief to Jamaica, Trevor Alleyne (left), and Financial Secretary, Dr. Wesley Hughes (right).

The unsustainability of this fiscal situation was heightened during the last fiscal year, as the share of revenue earmarked for interest payments peaked at 66 per cent. The global financial crisis and the subsequent fall-out of the Jamaican bauxite/alumina sector and export industries generally meant that the Government had to take prudent steps to mitigate the effects of the recessionary storm clouds.

One strategy which the Government used in light of the virtual shut-down of the global financial markets – but to which it was already committed— was increased engagement with the multilateral financial institutions. The Government’s re-engagement in 2009 with the International Monetary Fund(IMF) had paved the way for substantial multilateral funding. Its thrust toward multilateral funding gained momentum in the early months of 2010. Over US$2.4 billion was raised at interest rates of between 0.63 and 1.5 per cent.

“By using lower cost multi-lateral budget support loans to replace more expensive commercial debt, the Government generated savings that can be used primarily to further reduce debt and alleviate poverty,” Finance and Public Service Minister, Hon Audley Shaw explained.

On February 4, 2010 the IMF approved a $1.27 billion loan for Jamaica which was underpinned by a 27-month economic programme featuring increased spending on social safety net programmes, policy reforms as well as the debt exchange programme to break the cycle of budget crises.

According to Jamaica’s Memorandum of Economic and Financial Policies (Appendix to the Letter of Intent), “The Government is firmly committed to implementing policy reforms to fundamentally transform the Jamaican economy and create the conditions for strong and sustained growth. The overarching objectives of this programme are to put the public debt/GDP ratio firmly on a downward trajectory, entrench fiscal discipline and accountability, and significantly raise real GDP growth rates.”

The Standby Facility was designed to help Jamaica implement its two-year medium term economic programme, which include: reform of the public sector to substantially reduce the large budget deficit; a debt management strategy to reduce debt servicing costs; and reforms towards strengthening the financial sector

In order to make sure Jamaica’s recovery is sustainable in the long run, the programme also includes a number of reforms in key areas, including tax policy to improve collection and administration; public sector reforms to reduce costs and increase efficiency; and fiscal responsibility legislation to improve budget planning and public financial management and make the Government more accountable.

On the Jamaica Debt Exchange, Minister Shaw was proud to declare: “We have been fortunate and our strenuous preparations have been well-rewarded. The transaction, which opened on January 14, 2010, closed with a participation rate of 99.2 per cent on February 24.”

The transaction resulted in the weighted average maturity of the domestic debt moving from 4.5 years to 9 years—which was unprecedented. The average coupon on outstanding domestic debt declined by an average of 650 basis points to 12.5 per cent. The estimated annual interest cost savings for the Government is $41.0 billion.

In summary, the JDX achieved the following: $700 billion domestic debt refinanced from an average of 18 per cent to 12 per cent; 25 new benchmark securities replaced 350 illiquid bonds; and 99.2 per cent participation, the highest on record world-wide.

With the consolidation of the debt swop, Jamaica’s credit rating improved. “In the period following the debt exchange, credit rating agencies upgraded Jamaica's sovereign debt rating, Eurobond prices on sovereign bonds have rallied, and the Treasury Bill rates have fallen to around 10 per cent, the lowest levels seen since 1982. Furthermore, the income and valuation losses related to the debt exchange appear to have been smoothly absorbed by financial institutions,” the Finance Minister emphasised.

During the second half of the year, the Government’s divestment programme also shifted into high gear. The sale of Air Jamaica to Caribbean Airlines halted the losses which amounted to $10 billion in 2009. The Government also stepped up negotiation for the sale of its shares in the bauxite industry. GOJ holdings in Jamalco has been sold, resulting in an average monthly savings on operations cost of $1 billion. Clarendon Alumina Production has been divested, thus removing the burden of production losses caused by the forward-sale contract of 2005, which cost the Government almost $1 billion per month.

In addition, Highway 2000 is being re-financed in order to save the Government some $3 billion in annual interest payments. The divestment of the loss-making sugar factories and estates has been undertaken, while the privatisation of the Norman Manley International Airport and the sale of government shares in the Jamaica Public Service (JPS), the sole distributor of electricity in the island, are also targeted for divestment.

Monetary and Fiscal Developments:

Since the beginning of 2010, the following noteworthy fiscal and monetary targets have been achieved:
- Single-digit Interest Rates: Interest rates are currently at single digits, down from over 15 years of double-digit rates. The latest Treasury Bill rate is the lowest in over 30 years.
- Projected deficit for the fiscal year 2010/2011 is 6.5 per cent, compared with a deficit of 10.9 per cent for fiscal 2009/10.
- Appreciation of the Jamaican dollar by just under four per cent since the end of January 2010. The exchange rate at the end of January was $89.87 to the US dollar and at December 1, 2010, the rate was just over $86.50, an indication that the Government’s efforts to achieve stability and build confidence in the economy are succeeding.

Sustainable growth and development:

The Government’s medium-term economic and financial programme is designed to return Jamaica to a path of sustainable growth and development. The programme focuses on the monetary and fiscal requirements needed to fundamentally transform the Jamaican economy in order to achieve this objective.

The aim is to reduce inflation, achieve greater stability in the exchange rate and lower interest rates, while reducing the debt overhang and stabilising the fiscal accounts. In the process, the programme aims at building a more resilient economy to give the country more manoeuvring room to cope with external shocks, such as the devastating effects of the recent global crises.

The Government has also committed to a number of regulatory reforms aimed at strengthening the financial system. Structural reform objectives, as they relate to the public finances, include the following:
- Fundamental public sector reform to enhance public sector efficiency and reduce the weight of public sector employee compensation.
- Rationalisation and reform of Jamaica's public entities, including divestment, mergers and closures.
- Unifying and enhancing the efficiency of tax administration and sharply reducing the incidence of incentives and "discretionary waivers."
- Establishment of a central treasury management system to enhance the efficiency and cost effectiveness of government cash management. Legislation of a fiscal responsibility framework to increase the certainty of attainment of programmed and budgeted fiscal objectives.
- The enhancement of the active debt-management capabilities of Government.

In addition, the Bank of Jamaica Act and the relevant statutes for the Financial Services Commission are being amended to strengthen the regulatory framework of licensed financial institutions.

Another important development was the promulgation of Credit Reporting legislation to be followed by the licensing and supervision of credit bureaus by the Bank of Jamaica. The establishment of credit bureaus will provide financial institutions with an effective means to improve their internal credit assessment capabilities and in a more surefootedness manner, return to their core business of providing competitive and affordable credit to the productive sectors.

The exchange rate has been stable and the country concluded the year with healthy Net International Reserves (NIR) of over US$1.7 billion.

The JDX success represents a collective understanding among the country’s partners for lower interest costs on the budget and in doing business.

The support of the multilateral partners—the International Monetary Fund(IMF) World Bank, Inter-American Development Bank and the Caribbean Development Bank - highlights the Government’s commitment to bring a new and transformative type of governance to the people of Jamaica while increasing the social safety net; producing balanced economic and social development.

Reflecting on the challenges, achievements and opportunities going forward, Minister Shaw called on all stakeholders to renew their commitment to grow the Jamaican economy.

“We are building the foundation for growth and prosperity. We have now created the fiscal space, the financial stability and the opportunity for the private sector to now take the lead in generating new investments and economic growth,” the Minister said.