Wed | Jul 18, 2018

Develop comprehensive liability management strategy - IMF

Published:Wednesday | August 24, 2016 | 12:00 AMMcPherse Thompson
Minister of Finance and the Public Service Audley Shaw (left) speaks at a press conference on the International Monetary Fund’s (IMF) extended fund facility review, while Dr Uma Ramakrishnan, IMF mission chief, looks on.

The International Monetary Fund (IMF) is urging the Jamaican Government to develop a comprehensive strategy for liability management to reduce concentration and refinancing risks, as it endorses the second sovereign debt buyback in just over a year.

Against the background of the latest tender offer earlier this month, IMF Mission Chief Dr Uma Ramakrishnan, in a statement following the 13th review under Jamaica's economic support programme, said, "The mission welcomes the authorities' recent proactive and successful liability management operation, which helped reduce refinancing risk in 2017 through 2019."

She added that "in order to further minimise concentration and refinancing risks, it is necessary to develop a comprehensive strategy for liability management".

In the context of banks, liability management refers to the use and management of liabilities, such as customer deposits, in order to facilitate lending and allow for balanced growth.

According to the United States Financial Industry Regulatory Authority, concentration risk refers to "the risk of amplified losses that may occur from having a large portion of [one's] holdings in a particular investment, asset class or market segment relative to [their] overall portfolio".

The Jamaican Government announced plans to issue a new long-dated bond as part of a tender offer to buy back its outstanding 2017 and 2019 global bonds, an offer which was accepted.

The prospectus for the offer indicated that Jamaica has experienced volatility in its macroeconomic drivers in addition to economic crises in recent decades, and that continued uncertainty might affect its ability to service its notes.

Before this month's offer, Jamaica was last in the market in July 2015 when it raised US$2 billion through a dual-tranche bond, part of which it used to retire some US$3 billion in PetroCaribe debt owed to Venezuela at a price of US$1.5 billion.

That buyback also helped Jamaica to reduce its debt-to-gross domestic product ratio by about 10 per cent.

According to the IMF's latest country report on Jamaica, it took Jamaica three years to re-establish domestic market access following the 2013 National Debt Exchange.




It added, however, that the hard work of facilitating debt market development is still ahead, noting that efforts are needed in more active use of liability management operations to enhance market liquidity and to mitigate refinancing risks.

Retiring undervalued bonds or refinancing high-coupon bonds helps book budget savings, build more liquid benchmarks, and improve the composition of Government's debt portfolio, the report said.

Dr Ramakrishnan also announced at a press conference last week that the mission held preliminary discussions on the broad contours of a successor programme after the current extended fund facility expires in April 2017, and that discussions are expected to continue in the months ahead.

Finance and Planning Minister Audley Shaw said the Government was considering engaging the IMF in a precautionary standby arrangement when the current programme ends.

He said that would allow the Government to continue on the programme of structural reform in various areas, with specific measurable performance objectives, "and at the same time you have a stand by arrangement with potential financial support in the event you need it (for) natural disasters, oil shocks, those sort of things that can affect your balance of payments".

Dr Ramakrishnan noted, however, that the mission's recommendation for any kind of arrangement with Jamaica after the current programme ends would be subject to approval of the IMF's executive board.




In July, Shaw indicated that the Jamaican Government had started discussions with the IMF on the format of a staff-monitored programme to replace the four-year extended fund facility.

However, there was clear consensus among business leaders and academia when they addressed a post-IMF programme forum organised by the Private Sector Organisation of Jamaica in Kingston - and at which Shaw spoke about the staff-monitored programme - that any successor programme Jamaica seeks to negotiate with the IMF beyond the current one should be such that it holds the Government to measurable targets and sanctions if they are not met.

A staff-monitored programme is an informal and flexible instrument for dialogue between the IMF staff and a member country on its economic policies.

Under such programme, the country's targets and policies are monitored by the IMF staff, but it is not supported by the use of the Fund's financial resources and it is not subject to the endorsement of the Fund's executive board.