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INTRODUCTION Review of FY 2001/02 Debt Strategy DEBT STRATEGY FY 2002/03
Maintaining a Prudent Debt Structure INTRODUCTION Prudent debt management continues to be an integral part of the management of public finances and Government’s overall macro-economic programme. The Government’s medium-term debt management strategy has been designed to return the public debt to sustainable levels, ensuring that the overall borrowing is kept within prudent levels and secured on the best terms available. It is envisaged that, over the medium term, the debt management strategy will be supported by continuous reduction in interest rates, a stable foreign exchange market, a reduction of the fiscal deficit and a return to fiscal surplus. Achieving sustainable levels of debt has necessitated the design and implementation of a comprehensive debt management strategy. The principal debt management objective is:
In addition to the improved macro-economic environment, the establishment of clear debt management objectives, proper co-ordination between debt management, fiscal and monetary policy, and the building of institutional and operational capacity within the Ministry of Finance and Planning have been the major factors contributing to the accomplishments in debt management in recent years. Debt management was challenged in FY 2001/02 by high interest rates particularly during the second half of the fiscal year, and by the additional fiscal requirements which arose as a result of the civil unrest in July 2001, the impact of the September 11 terrorist attacks in the USA and the costs of flood damage resulting from Hurricane Michelle in November. These resulted in an increased need for debt financing. Jamaica’s sovereign credit ratings were re-affirmed by the rating agencies during FY 2001/02. In May 2001, Moody’s Investors Service re-affirmed its Ba3/Stable outlook for foreign currency debt. Also in May, Standard and Poor’s upgraded Jamaica’s sovereign rating from B to B+ and revised the outlook from positive to stable. These were re-affirmed in March 2002. The re-affirmations are endorsements of Government’s macro-economic management and allow for more favourable financing terms in the international capital markets. As an endorsement of the Government’s efforts to strengthen the quality of debt management and implement sound debt management practices, Jamaica has been selected to be part of a study to accompany the IMF/World Bank’s publication - Guidelines for Public Debt Management. Jamaica will be one of 18-20 countries to be part of a document of sample case studies of countries that have developed "strong systems of public debt management".
Review of FY 2001/02 Debt Strategy Total public sector debt stood at $380.6 billion or 113.1% of GDP at end-March 2001. The stock of public and publicly guaranteed external debt stood at $165.6 billion (US$3,624.3 million) or 49.2% of GDP and Central Government domestic debt totaled $215.1 billion or 63.9% of GDP. With the assumption of the remaining $79.3 billion in liabilities associated with the restructuring of the financial sector on April 1, 2001, Central Government domestic debt rose to $294.4 billion or 87.5% of GDP. This resulted in a marked increase in the total debt stock to $459.9 billion or 136.7% of GDP at the beginning of FY 2001/02. The assumption of all remaining FINSAC liabilities brought the total debt assumed in relation to the restructuring of the financial sector to $116.1 billion or 34.5% of GDP at the beginning of the FY 2001/02. By the end of March 2002, the total public sector debt stock stood at $494.9 billion or 133.1% of GDP. The domestic debt increased to $300.2 billion or 80.7% of GDP. As a result of prepayments during the year, at end-March 2002, FINSAC-related debt accounted for 33.5% of outstanding domestic debt or 27.1% of GDP. Excluding the FINSAC related debt, domestic debt grew by 2.7% compared with a growth rate of 7.3% in FY 2000/01. The stock of public and publicly guaranteed external debt increased to $194.7 billion (US$4,089.2 million) or 52.4% of GDP at end-March 2002. This growth primarily reflected bond issues in the international capital markets and net inflows from the multilateral institutions. Consequent on the September 11 terrorist attacks in the USA and the flood damage arising from Hurricane Michelle, a US$75 million loan was provided by the World Bank for economic rehabilitation. The Inter-American Development also disbursed a US$60 million social sector loan during the year. These are all long-term funds and are at concessional rates. The major components of Government’s debt strategy for FY 2001/02 were to:
Strengthening the Market Mechanism The Government’s programme of issuing Local Registered Stock (LRS) – the primary debt raising instrument - through the auction, met with considerable success until September 2001. Monthly auctions of LRS were conducted with an average volume of $2.5 billion. However, the impact of the September 11 terrorist attacks in the USA resulted in uncertainties in the domestic market that resulted in pressure on the foreign exchange rate. This severely constrained the Government’s ability to continue its programme of issuing long-term Jamaica dollar instruments. Investors’ appetite for longer-term securities waned and at the same time they demonstrated a preference for holding foreign currency. Consequently, financing during the second half of the fiscal year was undertaken predominantly through the issuance of US$-denominated, US$-Indexed and Investment Debenture instruments.
Achieving a Prudent Debt Structure Increasing the Share of Fixed-Rate Debt Reducing the sensitivity of the domestic debt portfolio, and consequently the fiscal exposure to unexpected interest rate shocks, has been a priority of the debt strategy. While the tendency is for interest rates to trend down slowly, interest rate shocks have been far more severe. The strategy adopted has been to increase the fixed-rate share of the domestic debt portfolio. Significant progress has been made in re-distributing the balance between domestic fixed-rate and variable-rate debt. Of the new debt issued in FY 2001/02, some 71% was contracted on a fixed-rate basis. The share of fixed-rate debt in the domestic debt portfolio has increased to 44% at end-FY 2001/02 from 34% at end-FY 2000/01 and 7% at end-FY 1999/2000. Extending the Maturity Structure Improvements in the macroeconomic indicators resulted in renewed investor confidence, which facilitated a positive shift in the maturity profile of the domestic debt. In April 2001, GOJ successfully issued its first 12-year LRS by auction. A total of six 12-year LRS’ for a nominal amount of $2.8 billion were issued by auction during the fiscal year with average yields falling from 17.98% in April 2001 to 15.9% in March 2002. The conversion of the remaining FINSAC liabilities to LRS also provided an opportunity for GOJ to lengthen the maturity profile of the domestic debt. These FINSAC bonds were converted at favourable terms with maturities as long as 20 years. Of the new domestic debt issued in FY 2001/02, 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 FY 2000/01. Of the total domestic debt outstanding at end-FY 2001/02, 17.7% had maturities of 5-10 years compared with 16.7% at end-FY 2000/01; 17.5% had maturities of 10-years and over, a marked increase over the 6.6% at the end of FY 2000/01. Consistent with the strategy to reduce the level of outstanding Treasury Bills, and given the market’s receptiveness to longer-term instruments, the Government refinanced 38.8% of the stock of Treasury Bills with longer-term securities during FY 2001/02. Outstanding Treasury Bills stood at $4,250.0 million at end-March 2002, down from $6,950.0 million at end-March 2001. The market’s appetite for long-term debt is also reflected in the successful issuance of a Government guaranteed 30-year Inflation-Indexed Infrastructure Bond for the financing of the first toll road. Government also succeeded in extending the maturity profile of the external debt portfolio. Due to favourable market conditions and strong demand, in May 2001, the Government issued a 10-year 11.75% US$400 million bond in the international capital markets. This was followed in December 2001,with Jamaica’s first 20-year Registered Global bond for US$250 million with a coupon of 11.625%. The economic rehabilitation and social sector loans from the multilateral institutions were also secured with long maturities of 17-20 years.
Diversification of the Debt Portfolio The Government considers diversification of Jamaica’s investor base an essential element for promoting market stability, enhancing market efficiency and increasing liquidity. These would result in lower market volatility. In the domestic market, the Government continued to issue a wide range of instruments. On the external side, the international capital markets bonds were distributed across a wider geographic area. Increased institutional investor participation complemented the retail investor base. In December 2001, the Government filed a Schedule B Registration Statement with the United States’ Securities and Exchange Commission (US SEC) for US dollar bonds to be issued in the international capital markets. The Statement was followed in February 2002 with the establishment of a US$700 million "Shelf" Registration programme. The Government plans to utilize the "Shelf" for the issuance of US dollar debt securities to the extent of US$700 Million over the next 2 years. The funds will be drawn in tranches over the two-year period. The SEC Registration will facilitate greater liquidity in Jamaica’s bond issues and a broadening of the external investor base and therefore enhance secondary market trading of the bonds. The Shelf Registration will give the Government greater flexibility and the ability to access the international capital markets at very short notice in order to take advantage of market opportunities.
Reducing the Debt Service Burden Given the magnitude of the FINSAC liabilities assumed by Central Government on April 1, 2001, strategies were implemented to manage the associated debt service costs. The FINSAC bonds were converted at favourable terms such that there was a lengthening of the maturity profile and a smoothing of interest payments to minimize the cash flow impact. The maturities of the new securities were extended up to 20 years. During FY 2001/02, some $15.4 billion of FINSAC liabilities was redeemed utilizing proceeds from the sale of shares in the Jamaica Public Service Co. Ltd. and the National Commercial Bank, from the sale of Life of Jamaica, the non-performing loan portfolio, other FINSAC-acquired assets as well as low-cost loan funds from the Inter-American Development Bank. Appropriate steps were taken during the year to improve the management of the alternative financing facilities. The Financial Administration and Audit Act was amended and regulations for the use of these facilities formulated. The Regulations seek to, inter alia, establish targets, put in place monitoring mechanisms and limit the use of the facilities to areas of infrastructural development. || Table of Contents | Next||
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