Sun | Feb 23, 2020

Column: Use multilateral money to buy PetroCaribe debt

Published:Friday | June 12, 2015 | 12:00 AM

At the end of January this year, the Dominican Republic negotiated a special buyback arrangement with Venezuela of its PetroCaribe debt.

Our Caribbean neighbour took the opportunity that Venezuela's desperate cash shortage afforded it and negotiated a whopping 53 per cent discount of its petroleum-related debt with the major South American oil producer.

The agreed discount reduced the Dom Rep's outstanding debt with Venezuela from US$4.1 billion to US$1.93 billion. That translated to a substantial 3.3 per cent reduction in Dominican Republic's debt-to-GDP ratio.

The Dominican Republic capita-lised on its acceptable fiscal deficit of 2.4 per cent of GDP - about US$1.6 billion - to go to the market with two bond issues which brought in US$2.5 billion. The bond market reacted favourably given the country's relatively low fiscal deficit and it's projected five per cent growth and four per cent inflation in 2015. The Hispaniola recipient of PetroCaribe largesse used US$1.93 billion of the proceeds of the bonds to buyback the debt from Venezuela.

One of the primary aims of the deal that Jamaica agreed with the IMF in May 2013 was the reduction of the quite unmanageable debt - about 150 per cent of GDP then - that burdened and still burdens the country. With that paramount objective in mind, it makes sense for the country to seriously try and avoid borrowing more money.

Securing the 53 per cent reduction on the PetroCaribe debt in a similar fashion as Dominican Republic would be a worthy exception in terms of undertaking new borrowing. The fashion of getting the deep 53 per cent discount like the Dominican Republic should be similar, but the financing method should be different. It should not be the same.


I am fairly sure that big American financial institutions will tend to look favourably at Jamaica's request to finance its prospective debt buyback deal with Venezuela. JPMorgan Chase arranged the Dominican Republic's repurchase transaction, so precedent has been set by America's bluest of Wall Street's blue-blood banks.

Jamaica should seek to employ a much less expensive financing approach. It needs to relentlessly press the multilaterals to finance this deal. As the PIGS of Europe - Portugal, Ireland, Greece and Spain - have their troika of lenders (the European Commission, European Central Bank and the International Monetary Fund), so too does Jamaica have its troika. Ours is comprised of the IMF, IDB and the World Bank.

The last time Jamaica went to market, Finance Minister Dr Peter Phillips and his team agreed to an interest rate of 7.65 per cent per annum on the bond, plus expenses. Jamaica's PetroCaribe loan outstanding is US$3.2 billion and a 53 per cent discount would reduce it to US$1.5 billion.

If we assume a reduced interest rate of seven per cent per annum, given the recent rating upgrades by the international rating agencies, and in spite of Jamaica missing the primary nominal surplus target last year, then the annual interest cost on the US$1.5 billion would be US$105 million each year, or $12.18 billion every year at current exchange rates.

But suppose Minister Phillips and his team of technocrats were to persuade the multilaterals - Inter-American Development Bank and the World Bank - to finance our buyback deal with the Venezuelans at, say, one per cent per annum, the annual interest cost to the country would be US$15 million or $1.74 billion each year.

The annual saving to taxpayers and citizens of Jamaica would be $10.44 billion compared to borrowing from the banks. The additional fees, if any, to the multilaterals would be much less than with commercial banks - local or foreign.

But the real value of doing the buyback deal with the multilaterals is recognised fully only when the tenor of the loan is considered. According to the minister of finance in the Dominican Republic, the average maturity of his country's PetroCaribe debt was 11.4 years. The average maturity of the new debt used in the buyback was 19.7 years. Should Jamaica enter a deal with the multilaterals, the annual estimated $10.44 billion would be significantly increased by the number of years agreed for the maturity of the loan.


There are many reasons why the Government may prefer to use big foreign banks and maybe their Jamaican partners to fund this transaction. No doubt, they will also roll out explanations as to why the multilaterals may want to avoid our request.

Venezuela's rocky and sometimes stormy relationship with the United States of America may be mentioned or alluded to. That allusion will carry very little weight given President Barack Obama's historic opening up to Cuba and his open and welcoming arms to Iran who was, until recently listed by Washington as the foremost state sponsor of terrorism on the planet. After all, Hugo Ch·vez was Cuba's Fidel Castro's most ardent mentee.

More important, the multilaterals should be invited and encouraged to decide whether their dislike of President Nicol·s Maduro and Venezuela is more important than putting together the funding for Jamaica's PetroCaribe debt buyback.

This would save very poor, over-burdened-by-debt Jamaica many tens of billions of Jamaican dollars. The transaction could be structured as a bullet payment and rolled at maturity for good interest payment performance.

As development institutions, the multilaterals would use their cash in the very worthwhile effort of reducing Jamaica's debt ratio, improve our debt profile and save us a bundle of foreign exchange every year.

Isn't it better to care for Jamaica's poor than to hate President Maduro?

Aubyn Hill is CEO of Corporate Strategies Ltd and chairman of the Economic Advisory Council of the opposition leader.


Twitter: @hillaubyn