Debt and Capital Market Developments

During FY 1999/00, the Government sought to implement the debt strategy outlined in Ministry Paper 10. This involved, inter alia, the introduction of more efficient and innovative ways to finance the budget in order to minimize borrowing costs and deepen the market. Efforts were also made to contain the growth of the debt stock. A key element of the strategy was the introduction of new financial instruments and techniques to the market and the broadening of the country’s domestic and international investor base.

The strategy was pursued within the framework of efforts to alter the structure of the domestic debt and in particular, to lengthen the maturity of debt instruments. The aim was to lengthen the maturity profile of the debt to have a larger proportion of domestic debt obligations with an average maturity of five years or more.

At the same time, Government continued its strategy to seek medium to long term funds externally at lower rates than those prevailing in the domestic market. This was consistent with the policy to approach the international capital markets for funding equivalent to gross external amortization. In FY 1999/00, US$400 million was targeted to be raised externally.

On the domestic front, the Government successfully introduced US dollar indexed-bonds to the local market and a new market-based approach to the sale of Local Registered Stock through an auction mechanism. In addition, the Government had moderate success in offering to the domestic market debt securities with maturities in excess of five years. There was significant appetite for Government’s offers of US dollar indexed-bonds which had maturities of five years or more.

Developments in the international capital markets in the first half of the 1999 did not allow Government to achieve its external financing requirement. Success was forthcoming in February 2000 when Government accessed EURO 200 million in the European markets. In addition, Jamaica raised US$100 million from the forward sale of bauxite. This, coupled with increased borrowings in the local market, allowed Government to successfully meet its financing requirements for FY 1999/00.

Preliminary estimates for the total debt stock at the end of March 2000 were $307,562.1 million, an increase of $45,261.4 million over the level at the end of March 1999. The domestic debt increased by 25.9% to $175,322.6 million while external debt, in Jamaican dollar terms, increased by 7.4% to $132,239.5 million. However, in US dollar terms, the external debt declined from US$3,215.8 million at the end of March 1999 to US$3,138.1 million at the end of March 2000.

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During FY 1999/00, the thrust of Government’s domestic debt strategy was to:

• Reduce the rate of growth of the debt stock by operating within a context of programmed borrowings;
• Continue efforts to reorganize the domestic debt stock towards longer term instruments by replacing maturing Treasury Bills and other short-term debt securities with longer term instruments;
• Improve the pricing mechanism for the issuance of Local Registered Stocks in order to lower borrowing costs;
• Diversify the choice of debt instruments available to the market.

The Government was successful in:

• Introducing an auction system for the sale of Local Registered Stocks. The system was implemented in October 1999.
• Reducing the level of outstanding Treasury Bills. At the end of March 2000, the balance outstanding stood at $9,550.0 million down from $10,450.0 million at the end of March 1999. In addition, the average Treasury Bill Rate fell from 21.3% at the end of March 1999 to 18.2% in March 2000.

• Introducing US dollar indexed-linked bonds in the domestic market. The first issue was launched in July 1999.
• Issuing some $10 billion in Local Registered Stocks and US dollar indexed-linked bonds with maturities in excess of five years.

The domestic debt stock stood at $175,322.6 million or 56.6% of the total debt outstanding at the end of March 2000. This represented an increase of $36,118.9 million or 25.9% over the stock of $139,203.7 million at the end of March 1999. Although the increase is significant, it compares favourably to the 37.1% increase recorded at the end of March 1999. This indicates some measure of success in Government's efforts to reduce the rate of growth of the debt stock.

Local Registered Stocks, the Government's medium to long term debt instrument, continued to be the major component of the domestic debt and accounted for 72% or $126,009.3 million of the total outstanding. Investment Debentures accounted for the second largest share of the total domestic debt outstanding at 14% or $23,959.0 million.

The increase in domestic debt during FY 1999/00 is attributable mainly to the following factors:

• Delays in accessing the programmed external borrowing.
• Lower than programmed tax revenue inflows.
• Continued assistance to FINSAC-intervened institutions amounting to $7,643.5 million
• Ongoing support to parastatal bodies and private sector entities of particular significance to economic development (for example, tourism and agriculture).

During FY 1999/00, gross domestic debt issued amounted to $77,261.2 million representing a net increase of $25,269.1 million or 48.5% over the programmed debt raising of $52,000.0 million projected for FY 1999/00.

Of the total domestic debt raised, $63,776.9 million or 82.5% was used to meet Government’s budgetary requirements, and $13,484.3 million or 17.5% for non-budgetary commitments. A significant portion of the non-budgetary debt includes $7,643.5 million and $1,829.8 million assumed on behalf of FINSAC and Air Jamaica, respectively.

At the end of March 2000, domestic debt service totalled $74,357.2 million the sum of $39,164.7 million in amortization and $35,192.5 million in interest payments. This represented an overall reduction of $3,544.1 million or 4.5% over the original FY 1999/00 Budget.

While amortization fell by 18.0% during FY 1999/00, interest expenses increased by 16.7%, mainly as a result of:

• The failure to attain the interest rate target. Budgeted interest costs were based on a projected reduction in domestic interest rates to 16.0% per annum by September 1999. However, interest rates were 19.2% at September 1999;
• Heavier than programmed domestic debt raising following the delay in raising external financing.

A number of debt indicators highlighted the impact of the debt on the Government’s budgetary resources in FY 1999/00. Reflecting the increase in the debt stock, higher than programmed interest rates and lower than projected revenue, domestic debt service payments absorbed 82% of total revenue and 47% of total expenditure.

At the end of September 1999, $649.6 million of Government of Jamaica Retroactive Salary Bonds matured. The Salary Bond programme was introduced in September 1992 when the Government issued bonds in lieu of retroactive salaries to public sector employees. At the time, two issues of Retroactive Salary Bonds were made; one tranche to Junior Doctors, which matured in 1995, and the second tranche to other public sector workers. Since September 1999, some 98% or 120,000 Salary Bond cheques (interest and principal) have been issued and delivered to the relevant Government Ministries, Departments and Agencies as well as to secondary-market bondholders.

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At the end of March 2000, the stock of public and publicly guaranteed external debt was estimated at US$3,138.1 million, a decline from the US$3,215.8 million recorded at the end of March 1999.

Heavy repayments and slow disbursements of bilateral and multilateral loans characterized loan activities during FY 1999/00. Net repayments to official creditors exceeded amounts raised from private creditors and accounted for the overall decline. In terms of new borrowings, there continued to be a shift from official sources towards private sources of credit during the fiscal year.

Jamaica, like other developing economies, has experienced a reduction in international aid flows in recent times as donor countries have reduced lending to developing countries and at the same time redirect aid to transitional economies in Eastern Europe. Jamaica has had to turn increasingly to the private capital markets, in particular, the international bond markets, for budgetary financing.

The reduction in multilateral and bilateral financing, along with the increase in private debt as a proportion of new borrowings, has impacted on the external debt maturity profile. However, Jamaica’s external loan portfolio remains fairly steady with 71% of loans owed to official creditors with a term to maturity of over 15 years.

The currency composition of the external debt remained virtually unchanged in FY 1999/00. Approximately 56% of Jamaica’s external debt was denominated in United States dollars, followed by the Japanese Yen with a share of 10.3%. This largely reflected the dominance of the United States (17%) and Japan (9%) as major creditors to Jamaica. The World Bank is the major multilateral creditor accounting for 12% of the total external debt outstanding.

At the end of FY 1999/00, external debt service amounted to US$602.7 million, an improvement of US$10 million over FY 1998/99. Of this, principal repayments amounted to US$416.4 million and interest amounted to US$186.4 million. Total debt service for FY 1998/99 amounted to US$612.9 million.

Jamaica continued to benefit from debt relief under the Mauritius Mandate debt initiative. This UK initiative allows for aid loans from the UK to lower-income countries and small island states to be fully written-off, on condition that the Governments of these countries are committed to transparent and accountable government and sound economic policies. During FY 1999/00, Jamaica received £5.5 million in debt relief from the United Kingdom.

Jamaica’s external debt indicators marginally improved during FY 1999/00. Total external debt measured as a percentage of Gross Domestic (GDP) was 47.6% compared to 48.2% in FY 1998/99. The debt service ratio (debt service as a percentage of exports of goods and services) decreased to 17.4% from 18.3% in FY 1998/99.

Viewed over a ten-year period, the external debt indicators have performed even better. Total external debt as a percentage of GDP has declined from approximately 142.0% at the end of FY 1989/90 to approximately 47.6% at the end of FY 1999/00. The debt service ratio fell from 30.0% in FY 1989/90 to 17.4% in FY 1999/00.

The uncertainty and instability in the international capital markets that started in 1997 and continued through 1998 started to abate in early 1999. As the markets recovered and gained momentum towards the latter part of 1999 and early 2000, emerging market issuers re-entered the market.

Following the crises in Asia and Russian and the contagion effects in Brazil, investors generally became more risk averse and began to more rigorously evaluate credit options. The result was that although the markets started to recover in early 1999, emerging market debts remained expensive. This was compounded by increases in US interest rates. Against this background, the Government thought it prudent to withdraw an issue planned for mid-1999, as the pricing would have been too expensive.

The advent of the Euro and the subsequent development of a healthy market in Euro-denominated international bonds provided an excellent alternative and a cheaper source of financing for the Government. In February 2000, the Government successfully issued a Euro 200 million three-year bond at a rate of 10% per annum in the European markets. With this issue GOJ was able to achieve several objectives:

• Meeting Government’s financing requirement while rebuilding the international reserves and reducing the need for financing on the domestic debt market
• Providing the Government with greater flexibility and choice in meeting its financing needs
• Diversifying Jamaica’s overseas investor base.

With the issuance of the Euro-denominated transaction, the Government has been able to broaden not only the geographic distribution of its overseas investors, but also access a wider range of investors. While the first two US denominated issues were purchased mainly by institutions and fund managers, the Euro transaction was also sold to smaller investors including asset managers and retail intermediaries from Germany, Switzerland, France and Italy.

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The Ministry of Finance and Planning conducted a debt strategy workshop in January 2000, with support from the European Union. The major outcome of the workshop was an analysis of current debt strategy issues which will form part of a comprehensive debt strategy review.

A preliminary strategy document based on the results of simulations using different economic and debt scenarios was produced for consideration by senior policymakers. The recommendations are included in the Government’s debt strategy for FY 2000/01.

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During FY 2000/01, the Government will continue to build on the debt strategies pursued in the previous fiscal year which, centred, inter alia, on:

• Lowering borrowing costs;
• Containing the growth of the domestic debt;
• Broadening the range of instruments;
• offered to the domestic capital market;
• Improving the efficiencies in the sale of Government debt securities through the use of public auctions;
• Interacting with the market-makers to allow for greater transparency and the further development of the domestic capital market; and
• Maintaining close contact with overseas investors, financial houses and rating agencies in order to ensure continued access to the international capital markets.

In addition to these strategies, Government also intends to introduce arrangements to monitor private sector debt in order to have more comprehensive debt information

A major development in the first quarter of FY 1999/00 was the implementation of new measures related to the withholding of tax on interest income from all investment securities. The decision was taken for all issuers of securities to withhold tax at source at a rate of 15%. This measure resulted in a change from a multi-tiered rate of withholding tax to a single rate being applied to Government and all other securities. Notably, these measures applied to those entities designated as ‘prescribed persons’, primarily financial institutions, which previously did not have tax withheld at source.

Arrangements were established for a "fast-track window" to refund qualified institutions. The implementation of these measures did not prove to be disruptive to the domestic securities market.

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PROFILE ON THE STOCK OF PUBLIC DEBT

(download the 7KB compressed file. Uncompressed file requires MS Excel 97)

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