Sat | Mar 17, 2018

Government considers reopening domestic bond market

Published:Wednesday | January 6, 2016 | 12:00 AMMcPherse Thompson
The Bank of Jamaica, Nethersole Place, Kingston.

The Jamaican Government is considering reopening the domestic bond market in the context of the large National Debt Exchange payment due in February, according to documents submitted to the International Monetary Fund (IMF).

The redemption of J$62 billion in government bonds, representing about four per cent of gross domestic product, and the associated liquidity spike which creates demand for new assets, provides an opportunity for the Government to restart the bond market through issuing the instrument at various maturities, it said.

To smooth out that large amortisation, the authorities have a strategy that involves a combination of new issuance of securities by the Ministry of Finance, partial sterilisation of the liquidity injection by the Bank of Jamaica (BoJ) using instruments at staggered maturities, and allowing for some liquidity expansion, in line with the monetary goals of the IMF programme.

According to documents submitted to the IMF executive board for the 10th review in December, the Jamaican authorities agreed that meeting the challenges of that large amortisation payment would provide an opportunity to deepen the collaboration between the Ministry of Finance and the central bank on debt and liquidity management.

"They also agreed that communicating the strategy clearly would help investors plan ahead and mitigate any risk of a disorderly market reaction," it said.

The IMF suggested that the completion of the transition of retail repos to the trust-based framework, and steps to strengthen financial sector safeguards, should allow the domestic bond market to be restarted in the near future.

To that end, it noted that the bond repayment in February provides a valuable opportunity to reopen the market through new issuances by the Government.

"A disorderly unfreezing of the government bond market could result in an upward shift in the yield curve, and could affect financial-sector stability, though this risk has been reduced with the successful transition of retail repos to a trust-based framework," the IMF said.

In its September 2015 country report on Jamaica, the IMF said that while the domestic bond market still remained largely dormant, its staff, which undertook the 10th review, welcomed the small volumes of secondary-market trading that had begun.

In the appraisal which forms part of the documents submitted to the executive board in December, the staff said a further loosening of monetary conditions is needed.

"In the current environment of low-inflation expectations, economic slack, and more supportive fiscal targets, monetary policy should refocus on lowering the costs of private credit while remaining attuned to the need to sustain a modest rate of inflation and accumulate non-borrowed international reserves," the staff said.

They emphasised that the J$62 billion liquidity inflow will need to be smoothed out through new bond issuance and partial sterilisation operations by the BoJ.

"However, some of this liquidity injection should be allowed to remain in the system to encourage private credit and provide much-needed support to economic activity," the staff said.