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Ministry Paper
Debt Management Strategy FY 2003/04 |
INTRODUCTION
- Since 1998/99, debt financing activities have been guided by the
Government’s medium term Debt Management Strategy. The strategy is critical to the
management of the fiscal operations and the Government’s overall macro-economic
programme. The key objective of debt management has been modified to broaden the focus
from minimizing borrowing costs to include risk management. Such an objective is
consistent with the guidelines for public debt management established by the IMF and the
World Bank.
- FY2002/03 proved to be a particularly challenging year for debt
management. The Government met the need for increased financing consequent on the
higher than programmed fiscal deficit and a deteriorating borrowing environment locally
and internationally. Interest rates fell in the first half of the fiscal year followed by
dramatic increases in rates during the second half of the year. The money market was
particularly tight during the last quarter. The relative stability in the international
capital markets deteriorated towards the end of the fiscal year due largely to uncertainty
caused by the threat of war. In light of these market developments, the Government had to
adjust its borrowing programme, particularly in the second half of the fiscal year.
- The credit rating agencies re-assessed Jamaica’s credit standings.
Moody’s Investors Service again re-affirmed its Ba3/Stable outlook for Jamaica’s
foreign currency external debt. Standard and Poor’s changed its outlook from
"Stable" to "Negative" but maintained its B+ rating in December 2002.
- Government achieved some success during the fiscal year in increasing
the fixed rate portion of the debt portfolio and further extending the maturity
profile of the domestic debt to include securities with 20- to 30-year maturities. The
debt portfolio was further diversified in terms of the range of maturities, the type and
geographic distribution of investors. The Government continued to maintain a presence in
the international capital markets.
- Despite the challenges, the Government has and will continue to service
its debt Obligations in accordance with Section 116 of the Constitution which
stipulates that all loans (both external and domestic) represent a statutory charge on the
revenues and assets of the country.
Review of FY2002/03 Debt Strategy
- At the end of March 2003, total public sector debt stood at $601.2
billion or 151.8% of GDP. This represented an increase of 21.0% over the $497.1 billion
at the end of March 2002. The stock of public and publicly guaranteed external debt stood
at $235.1 billion (US$4,180.0 million) or 59.4% of GDP and Central Government domestic
debt totaled $366.2 billion or 92.4 % of GDP. The main factors accounting for the increase
was the issuance of debt instruments to correct the imbalance on the Central Bank’s
balance sheet; the assumption of contingent liabilities; the higher-than-programmed fiscal
deficit; disbursements under the Social Safety Net programme and the sharp depreciation in
exchange rates.
- The stock of domestic debt stood at $366.2 billion or 92.4 % of GDP at
the end of March 2003. This represented an increase of 22.0% relative to the
$300.2 billion at the end of March 2002. The increase is attributable to:
- the need to finance a higher-than-programmed fiscal deficit;
- the fallout in external financing due to unfavourable conditions in the international capital markets;
- the issuance of additional debt instruments to the Bank of Jamaica finalizing the arrangement to convert BOJ/FINSAC bonds to LRS;
- the issuance of debt instruments to cover the Bank of Jamaica losses;
- the assumption of debt obligations of public sector entities such as
the National Water Commission;
- and the sharp depreciation in the J$ vis-à-vis the US$, given the
increased share of US$-indexed bonds in the portfolio. While the stock of US$-denominated bonds increased by 1.2% in US$ terms, the increase in J$ terms was a significant 19.6%.
- Public and publicly guaranteed external debt increased by 19.4% to
$235.1 billion or 59.4% of GDP at the end of March 2003. In US$ terms, the external debt
rose by a mere 1.1% from US$4,135.3 million at the end of March 2002 to US$4,180.0
million. This growth primarily reflected:
- the final disbursement of funds from the multilateral institutions for the
restructuring of the financial sector which were used to redeem the LRS
converted FINSAC bonds
- flows under the Social Safety Net programme;
- increased Government guarantees mainly for the Government-supported portion of Highway 2000; and
- adverse movements in the Euro/US$ and J$/US$ exchange rates.
- The FY2002/03 debt management strategy sought to:
- Maintain a prudent debt structure;
- Further diversify the debt portfolio;
- Increase reliance on market-determined instruments for domestic debt
issuance;
- Promote and build a liquid and efficient market for government
securities;
- Increase the transparency and predictability of primary market debt
issuance.
Maintaining a Prudent Debt Structure
Increasing the Share of Fixed-Rate Debt
- A priority of the debt strategy has been to insulate the debt portfolio
from adverse movements in interest rates by increasing the share of fixed rate debt. At the end of FY2002/03, 48.4% of the outstanding domestic debt was issued at fixed rates. This was an improvement over the 43.2% recorded at the end of FY2001/02, and compared favourably to fixed rate shares of 32.8% and 7.0% in FY2000/01 and FY1999/2000,
respectively.
Extending the Maturity Structure
- Despite the challenges, there was success in extending the maturity
structure of the debt. An inaugural issue of a 15-year LRS in June 2002 met with
significant success. Offers of $805 million chased the $300 million stock offered.
Building on this success, the Government auctioned its first 30-year LRS in August 2002.
Similarly, there was strong demand for this offer, with subscriptions of $1,104.3 million
in response to the $300 million LRS offered. A subsequent 30-year $300 million LRS was
issued in September 2002, with subscriptions amounting to $1,423.0 million.
- The demand for long-term instruments continued into the third quarter
of FY2002/03 in an apparent need by institutional investors to ensure an appropriate
mix of maturities on their balance sheets. A significant 41.5% of the funds raised through private placements had maturities in the 15- to 30-year range. The Government modified its stance and adopted the strategy of entering the market less frequently for funds offering instruments of shorter maturities when the interest rate
climate changed.
- Of the total new domestic debt issued in FY2002/03, 51.9% had
maturities of 5 years and over compared with 49.4% in FY2001/02. Of this amount, 33.9% had
maturities of 10- to 20 years, up from 15.5% in FY2001/02; 17.0% had maturities of over 20
years and up to 30 years compared with 2.3% in FY2001/02. Issues with a maturity of 30
years accounted for 3.6% of new issuance compared with none previously.
Minimizing Currency Exposure
- In keeping with the strategy of offering investors a wide range of
instruments, the Government continued to offer US$ indexed bonds in the domestic market.
The objective of issuing US$ indexed bonds is to offer risk-averse investors protection
against currency depreciation. The strategy is to offer this instrument within specific
limits in order to minimize the risk to the debt portfolio. US$-indexed bonds amounted to
$42.3 billion (US$752.5 million equivalent) or 11.6% of total domestic debt at the end of
FY2002/03. This compared to $20.8 billion (US$435.9 million equivalent) or 6.9% in
FY2001/02. The stock of US$-denominated bonds in the domestic debt portfolio stood at
US$543.8 million at the end of March 2003, an increase of 1.2% from the US$537.1 million
at the end of March 2002. However, in J$ terms, the value of these bonds rose a
significant 19.6% to $30.6 billion, accounting for 8.2% of outstanding domestic debt. The
frequency with which US$-indexed bonds were issued in the last quarter of FY2002/03
increased in order to support efforts by the Central Bank to stabilize the foreign
exchange market. These instruments were offered with relatively short maturities.
Diversification of the Debt Portfolio
- During FY2002/03, the Government sought to diversify the portfolio by offering instruments of various types and maturities, taking into account the cost vis-a-vis the risk preferences of investors. On the domestic side, instruments were issued across the yield curve including long-term securities with maturities of 15, 20,
25, and 30 years. A range of instruments were issued - LRS, investment debentures,
US$-indexed bonds and loans - satisfying the needs of institutional and retail investors.
- On the external side, in keeping with the policy of approaching the
international capital markets for funding to the extent of gross external
amortization, the Government sought US$500 million from these markets. In June 2002,
Government successfully issued a 15-year 10.625% US$300 million Eurobond in the
international capital markets. Long-term institutional investors such as insurance
companies, mutual funds and pension funds participated actively in the issue, a number of
whom had not participated in previous GOJ Eurobond issues. There was also a broad
geographic distribution of the transaction. Attempts to raise Euro-denominated funds in
the European markets during the last quarter of the fiscal year were postponed despite
strong demand. Sharp increases in yields on existing GOJ US$ eurobonds meant that the
Government would have had to pay higher premiums for the contemplated transaction.
Use of the Market Mechanism
- One of the key objectives of the Government’s FY2002/03 debt
strategy was to increase the use of the auction for the sale of government securities
in the domestic market. While Treasury Bills have been auctioned for many decades, the
auction of LRS, the Government’s primary debt raising instrument, was introduced in
October 1999. The sale of these securities through the auction has been widely accepted by
the domestic market.
- The plan in FY2002/03 was to expand the range of government
securities sold through the auction. The rationale was that auctioning these securities
would, through the competitive bidding process, allow the Government to realize lower
borrowing costs. A stable market environment is an important precondition to the
first-time sale of other instruments by auction. The growing market instability which
characterized FY2002/03 militated against expanding the range of securities offered for
sale through the auction.
- Auctions were the primary means by which LRS were sold during the
first half of FY2002/03. A landmark development during this period year was the
successful public issue, by auction, of the Government’s first 15-year and 30-year
LRS. The issues underscored the market’s confidence in the use of this mechanism to
appropriately price Government securities of various maturities.
- The stance taken to stabilize the foreign exchange market during
the second half of FY2002/03 led to a retreat by the market from purchasing longer-term
government securities and a general rise in uncertainty about the direction of money
market rates. The Government adjusted to these adverse market conditions by relying more
heavily on private placements for budgetary financing. The selection of financial
institutions for these private placements was done through a competitive bidding process,
in keeping with the Government’s stated policy. Of the new debt, $37.2 billion or
30.5% was raised through private placements.
Developing the Domestic Securities Market
- As the dominant player in the debt securities market, the
Government views the development of an efficient domestic capital market as vital to meeting
its debt financing requirements in a cost-effective and efficient manner. Government has
therefore taken an active role in the discussions and development of the market. This
includes measures to increase transparency and accountability, to provide more
comprehensive data on a timely basis, and to use market-based mechanisms for debt
issuance. In FY2002/03, debt financing activities continued to benefit from the steps
being taken to develop the domestic capital market. Government met 78.5% of its total
funding requirement from the domestic market.
- As part of the strategy for developing the capital markets in
FY2002/03, the Government committed to initiating efforts to promote a more liquid
secondary market through the re-opening of existing LRS. Towards this end, in conjunction
with the Bank of Jamaica, measures were implemented for the necessary technical
enhancements to be made to facilitate the re-opening of securities on E-GATE, the central
bank’s electronic treasury management system.
- Steps were initiated during the fiscal year to assess the
feasibility of the gradual introduction of the "immobilization" of Government
securities, i.e., the reduction in the issuance of paper certificates. A preliminary study
was done and working in conjunction with the Financial Services Commission, efforts are
underway to determine the levels of readiness of the market and the systems for
immobilization.
- The Government continued to maintain a transparent relationship
with the market. Quality information continued to be made available with an expansion in
the coverage and medium through which it is circulated. In January 2003, the Government
began subscribing economic and financial data to the IMF’s General Data Dissemination
System (GDDS). The GDDS was established to guide participating countries in the provision
of timely, comprehensive, accessible and reliable economic, financial and
socio-demographic data to the public.
- Over the course of the fiscal year, the Government maintained
frequent contacts with local and international investors, financial institutions and the
credit rating agencies through meetings, conference calls and investor presentations. The
interaction was at the ministerial and technical levels.
DEBT STRATEGY FY2003/04
- The Government’s medium term strategy is to return the fiscal
operations to a balanced budget by FY2005/06. The debt management strategy for
FY2003/04 is developed within this context. The primary objective is to minimize debt
service costs subject to the containment of risks within acceptable limits.
- The core debt objectives have been established since FY1998/99 and
these remain unchanged. The debt management strategy to be implemented in FY2003/04
will continue to:
- Maintain a prudent debt structure;
- Use market mechanisms for domestic debt issuance;
- Promote and build a liquid and efficient market for government
securities;
- Increase the transparency and predictability of primary market debt
issuance;
- Finance the fiscal deficit and debt redemption;
- Access the external markets for funds to the extent of gross external
amortization.
- The emphasis in FY2003/04 will be modified in light of prevailing
market developments, the fiscal performance and the size of the debt while
keeping the broad objectives of the strategy unchanged.
Maintaining a Prudent Debt Structure
Given the size of the debt stock, the Government will continue to focus
on achieving a prudent debt structure in terms of composition and maturity.
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.
Increasing the Share of Fixed-Rate Debt
- The main risk to the debt portfolio is that of higher interest costs as
a result of increases in interest rates. In FY2003/04, the policy of increasing the
share of fixed rate debt in the domestic portfolio will remain foremost among the debt
strategies. This should reduce refinancing risk. The fixed rate target of 60% of the
domestic debt portfolio will be maintained, in keeping with international best practice.
However, the target will be kept under constant review in order to ensure an optimal
distribution.
Extending the Maturity Structure of the Debt
- 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.
- Building on the success over the years, extending the maturity profile
of both the external and domestic debt will remain a priority for the debt strategy
during FY2003/04. Market conditions permitting, the strategy is to increase the number of
offers of LRS with maturity of 10 years and over.
- In the domestic market, the Government will initiate a limited
programme of exchange offers with the objective of smoothing the distribution of the
maturities. With the exchange offers, the Government will offer investors the opportunity
to exchange securities nearing maturity (of up to one year) with new securities being
offered with longer maturities. Similar types of debt buyback will be explored for the GOJ
international bonds, mainly for market management reasons.
Minimizing Currency Exposure
- The Government is committed to providing an array of instruments to the
domestic markets. Maintaining a prudent domestic debt structure requires that
the foreign currency exposure of the portfolio be reduced to internationally accepted
standards. Consistent with this, the Government will restrict the use of US$-denominated
and US$-indexed bonds to facilitate the gradual reduction of the foreign currency exposure
of the domestic debt portfolio over the medium term. Hedging mechanisms to minimize
Government’s exposure to adverse movements in currencies other than the US$ will be
kept under constant review.
Use of Market-Based Mechanisms
- Government domestic securities are offered for sale in the primary
market by auctions, the placing of fixed rate instruments and through private
placements. The FY2003/04 debt strategy will continue to use market-based mechanisms for
the sale of government securities in the domestic market. Subject to market conditions,
the Government will hold monthly auctions.
- While remaining committed to the use of market-based mechanisms as the
primary vehicle for raising the necessary budgetary financing, the Government
intends to maintain flexibility in terms of its financing and market timing. Consequently,
the Government will continue to tap the market utilizing the option of raising funds at
short notice through private placements. These will be arranged with institutional
investors on a competitive bidding basis when changes in the financing requirements and
unforeseen market conditions deem it necessary.
Developing the Domestic Securities Market
Re-opening and the Development of Benchmark Issues
- With the necessary technological enhancements to E-GATE expected to be
completed in the first half of FY2003/04, the re-opening of existing stock of LRS
will be implemented. The re-opening will facilitate the development of
"benchmark" securities in the market. This measure will help to boost market
liquidity and lower debt costs. This will be done through Government offering larger and
more liquid instruments. In FY2003/04, the process will commence in the second half of the
year after the E-GATE enhancements have been completed. Existing stocks of LRS will be
re-opened and a limited number of larger issues in key maturities will be introduced on a
gradual basis to create benchmark securities.
Immobilization of Domestic Securities
- Immobilization allows for the electronic registration and settlement of
Government securities and hence the reduction of paper certificates. This will
increase the efficiency of the domestic capital market and reduce the risks associated
with the holding, trading and settlement of securities.
- The Government will continue to focus on the development of a modern
and efficient domestic capital market infrastructure. During FY2003/04, a
comprehensive study of the local market will be undertaken in order to ascertain the
feasibility of immobilization of securities. In addition, a review of the relevant pieces
of legislation will be undertaken.
Increased Transparency
- The Government publishes comprehensive debt data on the domestic and
external markets on a regular basis. Information on Government’s debt
operations are publicly disclosed by means of advanced notices of upcoming issues, LRS and
Treasury Bills auction calendars. Information on Government’s debt, its strategy,
operations and relevant investor information are available on the Ministry’s website
(www.mof.gov.jm/dmu). The Government attaches a high level of importance to providing the
markets with accurate and timely data.
Calendar of Announcements
- To further 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, the publication of an annual
calendar for Treasury Bills and a calendar of LRS auctions on a quarterly basis.
- The calendars 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.
- The Government will advise the market on a regular basis of the
quarterly financing requirements. Details on the amounts, the type of instruments to be
issued and the timing will be announced on a timely basis.
- Transparency and predictability do not prevent changes in borrowing
plans or the type of instruments used. 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.
As in the past, such changes will be communicated to the market on a timely basis.
- Given its demonstrated commitment to transparency, the Government will
continue to select international bank(s), through a process of competitive bidding,
to act as lead manager(s) for its international capital markets issues.
Market Consultations
- While technological advances have facilitated and promoted increased
efficiency and effectiveness in operations, personal interaction with the financial
markets remains a priority. The global nature of the capital markets further emphasises
the importance of investor relationships. The Government will continue to actively engage
local and international investors and market players in dialogue to ensure a better
understanding of their needs as well as market developments in order to ascertain the most
favourable borrowing terms.
- While a forum already exists for such dialogue through regular meetings
of the Primary Dealers with Government agents, Government’s debt managers aim to
hold meetings twice yearly with market participants.
Medium-Term Target
- Management of the debt dynamics is a critical aspect of the fiscal and
macro-economic programme. The principal objective is to reduce the debt to sustainable
levels. As a result, an active debt management strategy has been adopted over the years.
Despite the challenges, progress has been madein insulating the debt from volatility in
the interest rates by increasing the fixed rate component of the debt, extending the
maturity profile of the debt to reduce refinancing risks, diversifying the debt portfolio
in terms of instrument types, maturities, investors and geographic distribution,
increasing transparency and accountability, and maintaining access to external and
domestic markets.
- Reducing the debt stock, and hence debt servicing costs, is part of the
Government’s overall medium term strategy and will be facilitated by accelerated
growth and the return of the fiscal operations to surplus. The medium-term programme is
designed to attain a balanced budget by FY2005/06. Within this context, and supported by
an improving macroeconomic environment, the debt to GDP ratio is projected to decline over
the medium term.
Omar Davies, MP
Minister of Finance & Planning
April 16, 2003
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