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The primary objective of Government’s debt strategy has been to secure low-cost long-term funding, while at the same time, giving due cognizance to the trade-off between risk and cost-minimization. Within this context, the Government pursued a debt strategy in FY2001/02 designed to achieve a more prudent debt structure; strengthen the market mechanisms for the sale of Government domestic debt securities; diversify the debt portfolio and reduce the debt service burden. The Government achieved measured success in pursuit of its debt strategy in FY2001/02. On the external side, the Government succeeded in raising long-term funding from the international capital markets as well as securing concessional financing from the multilateral institutions. In so doing, the objective of diversifying Jamaica’s external investor base was also satisfied. While significant progress was made in extending the maturity profile, domestic debt financing was challenged by (a) the assumption of the remaining FINSAC liabilities and the associated debt service costs; (b) a high interest rate environment and uncertainties in the wake of the September 11 terrorist attacks in the USA which resulted in pressure in the foreign exchange market; and (c) the additional fiscal costs as a result of the civil unrest in July 2001 and the flood damage due to Hurricane Michelle in November 2001. Preliminary estimates indicate that at end-March 2002, the stock of public sector debt stood at $494,886.9mn or 133.1% of GDP. This represented a 30.0% increase over the $380,640.7mn or 113.1% at the end of March 2001 and was due primarily to the assumption of FINSAC debt, increased international bond market activities and net inflows from the multilateral institutions. With the assumption of all remaining $79,297.3mn in FINSAC liabilities, the stock of domestic debt increased from $215,084.1mn or 63.9% of GDP at end-March 2001 to $294,381.1mn or 87.5% of GDP at April 1, 2001. The external public and publicly guaranteed debt grew by 14.9% to $194,685.9mn (US$4,089.2mn) or 52.4% of GDP. This growth primarily reflected increased bond issues in the international capital markets and net inflows from the multilateral institutions.
Debt Stock In keeping with its objective of achieving and maintaining a more prudent debt structure over the fiscal year, the Government succeeded in containing the growth in the domestic debt stock. At the end of March 2002, the stock of domestic debt stood at $300,210.5mn or 80.7% of GDP. This represented an increase of $85,126.1mn or 39.6% over the same period last year. The major portion of the increase, 93.0%, was attributable to the Government’s assumption of the obligations relating to the financial sector restructuring. At end-March 2002, FINSAC-related debt accounted for 33.4% of outstanding domestic debt or 27% of GDP. Excluding these obligations, the debt would have grown at a much slower rate of 2.7%, when compared to the 7.3% growth at the end of the previous fiscal year. The two major components of the domestic debt, Local Registered Stocks (LRS) and US$ Issues, together accounted for $258,432.8mn or 86.1% of the stock of domestic debt. LRS, the Government’s medium to long-term debt instrument, represented approximately 70.6% of total domestic debt at the end of FY2001/02. This compared with 74.3% at the end of March 2001. US$ Issues are divided between US$-denominated bonds which account for $25,571.1mn or 8.5%, and US$-indexed bonds which represent $20,751.6mn or 6.9% of the stock, respectively. The use of local US$ instruments for domestic financing has more than doubled during FY2001/02 moving from $17,430.8mn at the end of March 2001 to $46,322.8mn at the end of March 2002.
Maturity Profile During the fiscal year, the maturity profile of the domestic debt lengthened. At end March 2002, 16.6% of the new debt issued had a maturity of 10 years and over, compared with 14.3% at the end of March 2001. Of the $17,711.8mn in LRS issued through the auction system, 86.4% had maturities of 5 years and over, compared with 53.5% or $7,650.0mn issued through the same process during FY2000/01. In April 2001, the Government successfully issued its first 12-year LRS through the auction system. This issue was oversubscribed by 434.6%. A total of six 12-year LRS’ for a nominal amount of $2.8bn was issued by auction during the fiscal year with average yields falling from 17.98% in April 2001 to 15.90% in March 2002. Some FINSAC notes were converted to government securities with maturities of up to 20 years. In keeping with Government’s objective of extending the maturity profile, $2,700.0mn or 38.8% of the stock of Treasury Bills was refinanced into longer-term Government instruments. Of the gross new domestic debt issued in FY2001/02, 22.0% had maturities of 5-10 years, compared with 20.2% in the previous fiscal year; 15.5% had maturities of 10 years and over, compared with 14.3% in FY2000/01. Of the total domestic debt outstanding at the end of FY2001/02, 17.6% had maturities of 5-10 years, compared with 16.7% at end of FY2000/01; 17.5% had maturities of 10-years and over, a marked increase over the 6.6% at the end of FY2000/01. The market’s appetite for long-term debt was also reflected in the successful issuance of a Government guaranteed 30-year Inflation-Indexed Infrastructure Bond for the financing of the first toll road.
Interest Rate Structure At the end of March 2002, 56.0% of the domestic debt had been contracted on a variable rate basis compared with 66.0% at the end of March 2001 and 93.0% at the end of March 2000. Government was successful in issuing gross new debt for the fiscal year in a ratio of 71.0% for fixed-rate instruments, 29.0% in variable rate and 0.03% in non-interest bearing debt. By increasing the share of fixed-rate debt, Government has succeeded in reducing the sensitivity of the portfolio to interest rate movements.
Use of the Auction Mechanism The confidence in and acceptance of the use of market mechanisms for the sale of Government securities have been demonstrated by market demand that continuously outweighs supply at each auction. Since October 1999 when the auction mechanism was first introduced issues continue to be significantly oversubscribed at an average ratio of 5:1. There has been a notable tightening of spreads, which has resulted in a reduction in interest costs. The reduction in average yields and the tightening of spreads continued into FY 2001/02. Average yields ranged from a high of 19.83% to a low of 15.75% and the resultant reduction in spreads ranging from a high of 530 basis points to an all-time low of 25 basis points. The Government’s programme of issuing LRS through the auction met with considerable success until September 2001. Monthly auctions of LRS were conducted with an average volume of $2.5bn. However, the impact of the September 11 terrorist attacks in the USA resulted in uncertainties in the domestic market. This severely constrained the Government’s ability to continue its programme of issuing long-term Jamaica dollar instruments as investors demonstrated a preference for holding foreign currency. Consequently, financing during the second half of the fiscal year was undertaken predominantly through the issuance of US$-denominated, US$-Indexed and Investment Debenture instruments.
Debt Raising Gross new debt issued during the fiscal year amounted to $152,931.2mn. Of this amount, $68,819.8mn or 45.0% was for budgetary purposes and the remaining $84,111.4mn or 55.0% for various non-budgetary purposes. A significant 94.3% of non-budgetary financing related to the debt assumed as part of the financial sector restructuring.
The remaining non-budgetary financing related mainly to deferred financing and debts assumed on behalf of Air Jamaica Ltd., the Sugar Company of Jamaica Ltd. and the JPSCo. Ltd. The JPSCo’s obligations were assumed as part of the privatization of that entity.
Debt Service For FY2001/02, domestic debt service totaled $120,110.9mn, of which $79,757.5mn was amortization and $40,353.4mn interest payments. This represented increases of 64.9% in amortization and 17.6% in interest payments over the levels in FY2000/01. The significant increase in amortization was attributable to the prepayment of certain FINSAC-related debts. Prepayments of some $15.4bn were made during the fiscal year utilizing proceeds from the divestment of JPSCo. Ltd. and Life of Jamaica, the sale of shares in the National Commercial Bank Ltd., the sale of non-performing loans and other FINSAC-acquired assets as well as low-cost loans from the multilateral institutions. Amortization also increased due to payments in relation to JPSCo, faster than programmed redemption of Treasury Bills, unprogrammed payments in relation to the Sugar Company of Jamaica, Air Jamaica Pension Fund and the repayment of unprogrammed short-term loans raised during the year. The increase in interest expenses was attributable to costs associated with higher than programmed debt issues, unprogrammed payments with respect to contingent liabilities and slower than projected interest rate reduction.
Interest Rates During the first half of FY2001/02, the average yield on the six-month Treasury Bill gradually trended downwards reaching 15.11% at the end of September 2001. This compared favourably with 17.13% at the end of September 2000. The benchmark six-month Treasury Bill is generally used to re-price variable-rate instruments. Following the September 11 terrorist attacks in the USA, in an effort to relieve pressure on the exchange rate, interest rates on the 270-day and 360-day Bank of Jamaica Reverse Repurchase Agreements were increased by over 400 basis points to 19.45% and 19.90%, respectively at the end of October 2001. This had an immediate effect on the market-determined Treasury Bill yields. The average six-month Treasury Bill yield increased from 15.11% at the end of October to 17.82% at end-November. Since then, in response to more favourable market conditions, interest rates returned to the downward trend. The subsequent decline in the Reverse Repurchase Agreement rates signalled adjustments to other key rates in the market. The average yield on the 6-month Treasury Bill fell from 17.82% at the end of November to 14.30% at end-March 2002.
Alternative Financing Mechanism In light of budgetary constraints, deferred financing has been used as an alternative method for financing infrastructure projects This method of financing represents collaboration between the public and private sectors in the provision of services and the development of infrastructure in the pursuit of economic growth. In order to support social sector and promote infrastructural development, the projects financed under this mechanism primarily cover construction and rehabilitation of roads, schools and bridges. As at March 31, 2002, $7,923.6mn has been disbursed and of this total, $4,998.6mn has been included in the domestic debt stock.
At the end of March 2002, the stock of public and publicly guaranteed external debt stood at US$4,089.2mn ($194,685.4mn) or 52.4% of GDP. This represented an increase over the US$3,624.3mn ($165,556.7mn) recorded at the end of March 2001. Concessional loans from the World Bank and the Inter-American Development Bank for economic rehabilitation and social safety net projects, as well as proceeds from two bonds in the international capital markets contributed to the increase. Government direct obligations increased by US$514.4mn or 15.9% to US$3,756.8mn. The acquisition of loans for social welfare programmes and the transportation sector accounted for this increase. Government guaranteed loans at US$314.2mn declined by 0.3% reflecting net repayments . Bilateral and multilateral obligations constituted the major portion of the external debt portfolio, accounting for 52.4% compared with 62.9% in FY 2000/01. Capital market bond issues represented 40.3% of the external debt portfolio up from 27.8% in FY 2000/01. The US dollar remains the major denomination in the currency composition of the debt, accounting for 76.4% at the end of FY2001/02 compared with 70.0% at the end of FY2000/01. However, there has been a notable shift among the other currencies with the Euro occupying the second largest position with 14.4%, replacing the Japanese Yen, which now has a share of 5.3%. The new prominence of the Euro is due to the increase in Government’s Euro-denominated bond issues and the conversion to Euro of loans previously denominated in various European currencies.
Debt Service For FY2001/02, external debt service amounted to US$545.2mn, an increase of US$24.9mn or 4.8%. Principal repayments totaled US$294.3mn and interest payments US$250.9mn. Debt service as a percentage of exports of goods and services, increased to 12.3% from 11.4% in FY2000/01. The current debt service ratio remains within the internationally acceptable benchmark of 20% and is a key determinant contributing to Jamaica maintaining its sovereign ratings.
Debt Forgiveness The United Kingdom (UK), the Netherlands and Canada provided debt forgiveness in FY2001/02. This was supported by a grant from the European Union. The UK, under the Commonwealth Debt Initiative, provides for forgiveness of certain loans with debt service payments falling due between April 1, 2000 and March 31, 2003. The total amount to be written-off over three years is £11.4mn. The Government received debt forgiveness in the amount of 12.5mn Netherlands Guilders (NLG) from the Netherlands Government covering debt service payments due in 2001. This compared to debt forgiveness of NLG 11.1mn granted in FY2000/01. The Government of Canada under its Official Development Assistance programme provided debt forgiveness in the amount of 18mn Canadian Dollars (CAD), representing principal and interest payments on a loan contracted in 1976 . This measure constitutes Canada’s support of the economic reforms being undertaken by Jamaica.
International Capital Markets Jamaica maintained its presence in the international capital markets during FY2001/02. Considerable success was achieved in extending the maturity profile of the external debt portfolio and diversifying the investor base. In May 2001, the Government issued a 10-year 11.75% US$400mn bond in the international capital markets. Due to favourable market conditions and strong demand, the initial offering of US$275mn was re-opened two weeks later for an additional US$125mn. In December 2001, the Government filed a Schedule B Registration Statement with the US Securities and Exchange Commission for US$ bonds to be issued in the international capital markets. This led to Jamaica’s first 20-year Registered Global Bond for US$250mn with a coupon of 11.625%. From an initial amount of US$50mn, this was upsized to US$250mn due to favourable market conditions and strong demand. Of this amount, US$200mn represents pre-funding for FY2002/03. The US SEC Registration will facilitate wider investor participation in Jamaica’s bond offerings. The Statement was followed in February 2002 with the establishment of a US$700mn "Shelf" Registration programme. The Government plans to utilize the Shelf for the issuance of US dollar debt securities for this US$700mn. The funds will be drawn in tranches over the next two years. Despite the turmoil in countries such as Argentina and Venezuela, and the global economic slowdown, Jamaica’s Eurobonds performed exceptionally well. These bonds traded at a premium, outperforming other similarly rated emerging market issues. Yields on Jamaica’s Eurobonds fell significantly, with the 12.75% 2007 Notes moving from 11.40% in April 2001 to 9.64% by end-March 2002. Similarly, the 11.75% 2011 Notes which began trading at 11.99% at issue in May 2001 fell to 10.35% by the close of FY2001/02; and the 11.625% 2022 Notes fell from 11.87%, at issue in December 2001 to 10.96% at end-March 2002. In May 2001, the credit rating agency Moody’s Investors Service re-affirmed the Ba3/Stable outlook rating for foreign currency sovereign debt. Also in May 2001, Standard & Poor’s upgraded Jamaica’s rating on long-term foreign-currency sovereign debt from a "B" to "B+" and revised the outlook from positive to stable. These ratings were re-affirmed in March 2002. The re-affirmations are endorsements of the Government’s macroeconomic management and allow for more favourable terms in the international capital markets.
As in previous years, the primary objective of the FY2002/03 debt management strategy will be to minimize debt service costs and to reduce the overall debt burden. In addition, a key strategic objective during FY2002/03 will be to foster the further development of a well-functioning domestic debt market, the benefit of which should be lower costs. Building on the approach adopted in FY2001/02 and consistent with the core debt objectives, the debt management strategy to be implemented in FY2002/03 will seek to:
Over the medium term, the major thrust and policy challenge will be to reduce the debt burden. Returning the fiscal operations to surplus combined with increased economic activities are critical underpinnings to the reduction in debt stock and the attendant debt servicing costs. With the medium-term fiscal programme designed to return the fiscal operations to surplus by FY2004/05, and supported by an improving macroeconomic environment, the projection is for a decline in the debt-to-GDP ratio to 100% by FY2004/05.
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