back to topDebt and Capital Market Developments
Government's debt strategy for FY 1997/98 aimed at reducing debt servicing costs. Key elements included lowering interest rates; rescheduling and refinancing; and prepayment where possible and affordable.
A number of factors mitigated against the successful implementation of the strategy. Rescheduling was limited by high interest rates, financial sector difficulties and a sluggish economy. After some prepayment early in the fiscal year, increased demand on limited resources rendered further prepayments unaffordable.
Achievements included Government's highly successful introduction to the international capital markets and the favourable rating received from Moody's, one of the premier rating agencies.
The total debt stock was an estimated $221,198 million at end-March 1998, increasing from $77,997 million at end-March 1992. Although domestic debt was the faster growing component, there was a marked slowdown in FY 1997/98. Growth in external debt slowed over the same period.
Domestic debt, Jamaican or foreign currency denominated instruments issued locally,
represented 46% of total outstanding debt at end-March 1998. Instruments include Treasury
Bills (short-term), Local Registered Stocks (medium to long-term), bonds and loans (short,
medium and long-term).
At end-March 1998, the stock of domestic debt stood at $101,495 million, up from $85,181 million at end-March 1997. This represents a 19.2% increase, down from the 47.7% increase in FY 1996/97.
A significant portion of the domestic debt buildup since FY 1991/92 has been for
non-budgetary purposes, including:
Of the outstanding stock of domestic debt at end FY 1997/98, $44,757 million or 44% represented obligations contracted to meet non-budgetary financing requirements.
Liquidity Management
Large additions to the stock of Treasury Bills and Local Registered Stocks (LRS) have been required for liquidity management, particularly during FY 1994/95 when issues of $20,900 million were required.
As part of Government's effort to eliminate Bank of Jamaica losses, Government instruments replaced maturing Certificates of Deposits (CDs) issued by BOJ. In order to accommodate the additional issues needed to reabsorb the liquidity arising from the maturing CDs, Government raised the Treasury Bill ceiling from $7,500 million to $12,000 million. This shifted some of the costs associated with open market operations from BOJ to Central Government. CDs totaling approximately $5,500 million were absorbed through new Treasury Bills and LRS in FY 1994/95.
Government also issued an additional $15,400 million of domestic debt in FY 1994/95, most of which was required to sterilize the large buildup in NIR.
During FY 1996/97, Government provided BOJ with $7,000 million in debt instruments to facilitate its open market operations and to sterilize the large unprogrammed increase in capital inflows. As part of continued fiscal support to the monetary programme, Government provided BOJ with an additional $7,630 million in debt instruments during FY 1997/98.
The interest and amortization costs on the FY 1997/98 budget arising from debt instruments issued to support the monetary programme totaled approximately $11,000 million.
Bank of Jamaica Losses
In addition to eliminating BOJ CDs, Government over the years provided BOJ with marketable interest-bearing securities equivalent to prior year losses to improve the income earning capacity of the Bank. BOJ recorded a small profit in 1995 as a result. BOJ is holding approximately $33,000 million, or 33% of Government's total domestic debt outstanding at end-March, 1998.
Takeover Of Parastatal Debt
Government takeover of parastatal debt has also contributed to the increase in domestic debt.
Government assumed approximately $6,900 million of parastatal debt between end-March 1992 and end-March 1998. Agencies contributing to this expansion include:
Air Jamaica (1994/95) $1,200 million
UWI/UHWI (1994/95) $1,200 million
NWC (1995/96) $1,100 million
Total $3,500 million
At end-March 1998, of the parasatal debt taken over, $1,630 million remained outstanding.
On-lending
In FY 1996/97, Government provided credit to financial institutions as part of its effort to stabilise and restructure the financial sector. Of the new domestic debt undertaken during the fiscal year, $2,739 million was for on-lending to support these institutions. In FY 1997/98, the financial sector required no budgetary support as all assistance to the sector was provided through the Financial Sector Adjustment Company (FINSAC), with Government guarantee.
In FY 1997/98, $1,390 million in new Government debt was issued to support Air Jamaica, both for on-lending and to cover payout on Government guaranteed obligations. The funds will be recovered through loan agreements entered into between Air Jamaica and Government. Support to the airline is in keeping with Government's 25% share holding and the airline's contribution to tourism, Jamaica's largest gross earner of foreign exchange.
Budgetary Financing
Containing monetary expansion has been critical to reducing both inflation and inflationary expectations. However, the tight liquidity conditions resulted in a slowdown in economic activities and hence slower revenue growth. Concurrently, expenditure increased, reflecting in part the accumulated fiscal cost associated with maintaining macro economic stability. As a result, additional budgetary financing was required in both FY 1996/97 and FY 1997/98.
The increase in domestic debt for monetary and fiscal purposes, while burdensome, has been critical to achieving macro economic stability. It reflects Government's commitment and support to the economic reform programme. With inflation now under control, a return to growth will ease future financing needs and allow for a gradual reduction in the debt stock.
At end-March 1998, the stock of outstanding Central Government external debt was estimated at $119,703 million (US$3,280 million), up from $102,706 million (US$2,929 million) at end-March 1997.
The growth in external debt in FY 1997/98 reflects borrowing in the private international capital markets. While obligations to multilateral creditors rose marginally, bilateral obligations continued to fall. Jamaica's graduation from Paris Club rescheduling arrangements with its OECD bilateral creditors in FY 1995/96 has accelerated the pace of loan repayments.
The slowdown in the growth of external debt during the 1990s can be attributed to such factors as:
In FY 1998/99, Jamaica will benefit from debt forgiveness by the British Government. In April 1998, Britain canceled debt payments of £7.3 million (approximately US$12.2 million) due during the fiscal year. The funds saved are to be channeled through the Ministry of Education to support the basic education programme.
Sovereign Issues
Government's external loan programme for FY 1997/98 included floating bonds on the international capital markets with the intention of raising US$300 million.
In July 1997, Jamaica successfully launched its first international bond offering. Led by Bankers Trust, Government approached the international capital markets to raise the first US$100 million of the programmed US$300 million. Strong demand by American and European institutional investors seeking diversification and high yield resulted in the offer being five times oversubscribed. This encouraged Government to double the size of the issue and tighten the spread. The US$200 million 5-year Euro/144A Notes due in 2002 attracted an interest rate of 9.625%, a spread of 335 basis points above the US 5-year Treasury rate.
In October 1997, Government attempted to raise the remaining US$100 million in the international capital markets. However, the currency and financial crisis in southeast Asia adversely affected the international capital markets forcing Government to delay the issue. A US$100 million bridge financing loan was secured through Citicorp Securities Incorporated. The 364-day loan attracted interest rates of less than 10%.
Jamaica's participation in the international capital markets follows naturally from its "graduation" from the IMF loan support programme and the Paris Club rescheduling arrangements. Access to private international capital provides Government with greater flexibility. It also raises Jamaica's profile in the international markets, improving access to credit and investment not only for Government but other public and private sector entities.
Sovereign Credit Rating
Having successfully entered the international capital markets, Government sought to further enhance its participation by obtaining a sovereign credit rating. The services of Moody's Investors Service, one of the leading rating agencies, was engaged.
In January 1998, Moody's conducted a two-day due diligence with a cross-section of the public and private sectors - including policy makers, business leaders, academics, political analysts and trade unionists. In March 1998, Moody's assigned a Ba3 sovereign ceiling for Jamaica's medium and long-term foreign currency bonds and notes. Foreign currency deposits were assigned a B1 ceiling. As is their standard practice, Moody's assigns a rating to foreign currency deposits one grade below the foreign bonds and notes, unless unusual risks are deemed to exist. Local currency medium to long-term bonds were assigned a Baa3 rating, the first investment grade level.
The sovereign credit rating represents an endorsement of Government's overall economic programme and improves Government's ability to access financing in the international capital markets. Investors use the rating as a guide in pricing Jamaican debt. The rating for sovereign risk also simplifies pricing of private sector debt, facilitating private sector access to the international capital markets.
Publication of IMF Assessment
As a player in the international capital markets, Government remains committed to transparency and full disclosure of information. For the first time, in October 1997, the IMF's assessment of Jamaica's economic programme - the Acting Chairman's Summing Up of the Article IV Consultations with Jamaica was published.
Capital Markets Seminar
As part of Government's continued commitment to the development of the capital market, the Ministry of Finance and Planning hosted its second annual capital market seminar in March 1998. Under the theme Economic Recovery Through Market Development, the seminar focused on: recent developments in the international financial markets, in particular the Asian crisis, and the implications for emerging markets like Jamaica; how domestic firms can access capital in the international markets; ways to develop the domestic capital market; and reconstructing banking systems.
Transfer of Debt Functions
Effective April 1, 1998, the Ministry of Finance and Planning resumed full responsibility for all debt management functions. As the only exceptions, BOJ will continue to pay external debt, conduct Treasury Bill auctions and accept applications for primary market issues of Government securities. The transfer of these functions coincides with the autonomous status of the Bank to be supported by pending legislation. The Bank will return to core functions, refocusing on the achievement and maintenance of monetary and financial stability.
Publication of Financing Plans
As part of Government's efforts to develop the domestic capital market, the Ministry of Finance and Planning will publish and update a schedule of Treasury Bill tender and issue dates.
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