Sat | Jun 23, 2018

Shaw predicts 105% debt ratio

Published:Thursday | January 25, 2018 | 12:35 PMSteven Jackson

Finance Minister Audley Shaw expects Jamaica’s debt-to-gross domestic product (GDP) ratio to fall towards 105 per cent by the end of the fiscal year.

The quicker fall is in part due to the recent round of currency appreciation. The dollar, since September 2017, appreciated from $131.30 to some $125 to US$1.

"We are targeting a reduction of debt-to-GDP of 107.1 per cent. I can now announce that the target will be achieved and exceeded. We will see a debt-to-GDP ratio of 105 per cent," said Shaw at the JSE Capital Markets Conference now on in Kingston. He added that by the 2025/26 fiscal year the ratio will hover at 60 per cent.

A debt-to-GDP ratio above 100 per cent equates to a household which owes more than it owns. 

The island hit a debt-to-GDP ratio of 141 per cent in the 2002/03 fiscal year following from the economic fallout of the 1990s.

"Jamaica has been positioned in a whole new light in the eyes of the international community," Shaw said about the country which issued debt at near junk bond rates in the early 2000s. Shaw indicated that the country can now raise debt at under 6.0 per cent.

The debt level puts the island some two years ahead of schedule, according to the JMMB Group, which did similar research on the glide debt-to-GDP path last year. JMMB indicated at the time that the drop in the figure is the result of a new definition of public debt issued by the International Monetary Fund (IMF), rather than a radical change in the economic dynamics of the island. The Ministry of Finance states that the new definition will allow for greater advantage to broaden the reporting of the public sector.

JMMB sees the rate dropping to 103 per cent of GDP by the of fiscal year 2017/18 due in part to a change in the definition of debt which eliminates cross-holdings of securities by some public sector entities.

"The question which flows from this is whether or not the Government of Jamaica is still obligated to repay the full nominal debt outstanding, to which the answer is in the affirmative,” stated JMMB in its research. “This, however, does not negate the progress made by the fiscal authorities in recent years under the aegis of the IMF to cauterise the deficit, place fiscal operations on a sustainable path, and reduce the debt ratio.”

Jamaica’s debt trajectory has fallen over the last two fiscal cycles and is expected to continue to move towards the levels embedded in the Public Debt Management Act of 96 per cent and 60 per cent by end-March 2020 and 2025 respectively, says the report of the research.

The Ministry of Finance, in response to Financial Gleaner queries, last year indicated that the new definition has the advantage of broadening the coverage of public debt reporting by moving beyond reporting on central government (and central government external guarantees) towards more comprehensive reporting for the wider public sector.

The Ministry added that since fiscal year 2013/14, the GOJ has been utilising two reporting definitions of debt — the government and the extended fund facility definitions. The Ministry said that in keeping with international best practices, the government adopted a single definition consistent with the consolidated reporting standard with respect to public debt statistics, effective April 2017.

Under the IMF Extended Fund Facility and the successor standby agreement, the resulting stable macroeconomic environment, precipitated by prudent fiscal policies and proactive debt management strategies has placed the public debt and related debt indicators on a downward trajectory. GDP growth recorded in fiscal year 2016/17 and projections for continued growth going forward has also supported the improved debt-to-GDP ratio.

steven.jackson@gleanerjm.com