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INTRODUCTION
Review of FY 2001/02 Debt Strategy DEBT STRATEGY FY 2002/03
Maintaining a Prudent Debt Structure DEBT STRATEGY FY 2002/03 As in previous years, the primary objective of the FY 2002/03 debt management strategy will be to minimize debt service costs and to reduce the overall debt burden. In addition, a key strategic objective during FY 2002/03 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 FY 2001/02 and consistent with the core debt objectives, the debt management strategy to be implemented in FY 2002/03 will seek to:
Maintaining a Prudent Debt Structure Given the size of the debt stock, a key component of the debt strategy has been to ensure the most prudent debt structure in terms of composition and maturity. The Government will therefore seek to borrow using a variety of instruments and a range of maturities to minimize costs and limit the risk to the debt portfolio arising particularly from currency and interest rate movements.
Increasing the Share of Fixed-Rate Debt Interest costs absorb a significant portion of the Government’s budgetary resources. In FY 2001/02, total interest payments accounted for 46.5% of total Government revenue, up from the 39.6% in FY 2000/01. Reducing interest costs and ensuring the predictability of interest payment amounts by increasing the share of fixed-rate domestic debt is foremost among the debt strategies to be implemented in FY 2002/03. The high level of variable-rate domestic debt makes the portfolio sensitive to movements in interest rates. Over the medium term, the Government will maintain the fixed-rate target of 60% of the domestic debt portfolio, in keeping with international best practice. The Government is cognizant of the trade-off between risk and cost minimization and will therefore review the target annually to ensure an optimal distribution.
Extending the Maturity Structure of the Debt Efforts will continue to lengthen the maturity profile of both the external and domestic debt during FY 2002/03. As in FY 2001/02, extending the maturity profile of the domestic debt will be achieved primarily by issuing longer-term LRS with a concentration of issues with maturities of 7 years and over. The debt strategy for FY 2002/03 is to increase the number of offers of LRS with maturity of 10 years and over and increase this share of LRS issues to 20% of the domestic debt stock by the end of FY 2002/03. Longer-term issues will allow for the achievement of a more balanced maturity structure and therefore reduce the risk associated with shorter maturities of rolling over the debt under adverse interest rate conditions. Following the successful issuance of long-term bonds in the international capital markets in FY 2001/02, market conditions prevailing, the Government will continue its efforts at extending the maturity profile of the international capital markets bond issues.
Minimizing Currency Exposure Management of the debt portfolio’s currency exposure will focus primarily on two areas; on the external side, minimizing the non-US dollar currency risk; and on the domestic side, limiting the share of US dollar exposure in that portfolio. The Euro, the second largest currency in the external debt portfolio, accounted for 14% of the total currency share at end March-2002. The conversion of several European currencies to the Euro and Jamaica’s issuance of Euro-denominated international bonds have resulted in a significant increase in the Euro’s share of the portfolio. While movements in the Euro vis-à-vis the US dollar have generally been favourable during FY 2001/02, the Government will take steps to ensure that it minimizes the portfolio’s vulnerability to possible adverse movements in the Euro in the future. The strategy for FY 2002/03 will therefore be, to use, where appropriate, hedging mechanisms to minimize the Government’s foreign currency exposure. The issue of both US$-denominated and US$-Indexed securities in the domestic market has led to an increasing share of the domestic debt portfolio being exposed to US dollar currency risk. At end-March 2002, these categories together comprised 15.4% of the domestic debt compared with 8.1% at end-March 2001. While the Government is committed to providing an array of instruments to the domestic markets, maintaining a prudent domestic debt structure requires that the US dollar exposure of the portfolio remains low. Consistent with this, the Government will seek to reduce this exposure to 14% by the end of FY 2002/03 and thereafter gradually reduce the US dollar exposure to a maximum of 10% of the domestic debt by the end of FY 2004/05.
Diversifying the Debt Portfolio The Government wishes to ensure that it has access to a wide range of sources for its domestic and external financing needs to keep debt servicing low and to maintain a diversified investor base.
Domestic Market The Government will structure the instruments offered to the domestic markets in a way that satisfies the demand of both institutional and individual investors and keeps debt service costs low. Debt securities will therefore be offered across a range of maturities and instruments. The issuance of inflation-indexed bonds will be kept under review and assessed in terms of investor demand and existing macroeconomic conditions. The Government will continue to offer a small volume of US$-Indexed bonds to the domestic market. The programme of issuance will take account of the need to limit the extent of US dollar exposure in the domestic debt portfolio and to maintain stability in the foreign exchange market.
External Market The Government will continue its policy of approaching the international capital markets for financing to the extent of gross amortization in the given fiscal year. The US SEC Registration will facilitate wider investor participation in Jamaica’s bond offerings.
Increasing the Use of the Market-Based Mechanisms Use of the Auction Mechanism The FY 2002/03 debt strategy will see increased reliance on market-based mechanisms for the sale of government securities in the domestic market. A debt management objective during FY 2002/03 will be to expand the range of instruments sold through competitive auctions in the domestic market. As a first step, consideration will be given to offering US dollar indexed bonds through the auction. During FY 2002/03, the Government will rely primarily on market-determined
public issues to raise the required budgetary financing. Changes in financing requirements
and unforeseen market conditions may require the raising of funds at short notice through
private placements. These will be arranged with institutional investors on a competitive
bidding basis.
Developing the Domestic Securities Market Development of Benchmark Issues During FY 2002/03, the Government will initiate efforts to promote a more liquid secondary market for its debt securities by reopening existing LRS and developing a limited number of ‘benchmark’ securities, or in effect, a limited number of larger fixed-rate issues in key maturities. A gradual approach will be adopted, with the building of such ‘benchmark’ issues taking place over the medium term. The development of highly liquid fixed-income securities in a few standard maturities is expected to contribute to lower borrowing costs over the medium- to long-term.
Immobilization of Domestic Securities The Government remains committed to the development of the domestic market and playing a catalytic role towards this end. The Government supports the development of a modern efficient market infrastructure, including the establishment/development of depository arrangements and settlement procedures for recording ownership and settlement of debt securities. As part of the FY 2002/03 debt strategy, steps will be initiated to reduce the issuance of paper certificates for government securities. This will involve, initially, consulting with market participants and the relevant institutions integral to the process involved in the holding of securities in electronic form. The immobilization of government securities will allow for the further development of the domestic capital market by increasing efficiency and reducing the risk associated with the holding, trading and settlement of securities.
Calendar of Announcements In order to increase transparency and predictability in Government’s debt operations and to maintain a well-functioning market for government securities, the Government will continue to keep the market informed of its financing plans. This will be done through the regular announcement of debt issues and the publication of an annual calendar for Treasury Bills and LRS auctions. The calendar will indicate the timing of such issues while the market will be notified of the amounts and terms of the issues no less than four business days prior to the tender dates. The Government will provide similar notices to the market in respect of other debt securities. As far as possible, the Government will seek to adhere to a strategy of regular debt issuance but will retain some degree of flexibility to take account of changes in the financing requirements and unforeseen market conditions.
Market Consultations In keeping with its twin objectives of reducing borrowing costs and further developing the domestic market, the Government is committed to maintaining an on-going dialogue with market participants to monitor market developments. It is anticipated that this engagement will foster a better understanding by the market of Government’s debt operations and debt management objectives while heightening Government’s awareness of the needs of the market. A forum already exists for such dialogue through regular meetings of the Primary Dealers with Government agents. In addition, Government’s debt managers will hold meetings twice yearly with market participants to further enhance the exchange of information.
The high levels of public debt and debt service costs have severely constrained the Government’s ability to invest in physical and social infrastructure necessary to promote investment and growth. Therefore, the major thrust and policy challenge has been the management of the debt dynamics within the context of an improving macroeconomic environment. Progress has been made in minimizing the debt burden and the imperative of the future is to build on the achievements to date. Returning the fiscal operations to surplus combined with increased economic activities are critical underpinnings to the reduction in the stock of debt and the attendant debt servicing costs. The medium-term fiscal programme is designed to return the fiscal operations to surplus by FY 2004/05. Within this context, and supported by an improving macroeconomic environment, the debt to GDP ratio is projected to decline to 100% by FY 2004/05. Omar Davies, MP
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