Fri | Apr 28, 2017

Editorial: Good return on economic discipline

Published:Sunday | July 26, 2015 | 7:00 AM

The result of Jamaica's foray into the bond market last week is a big deal, which underlines the Government is sensible to stick to its obligations under the agreement with the International Monetary Fund (IMF).

Peter Phillips, the finance minister, signalled his wish to borrow around US$2 billion and the market offered him US$4.5 billion, or 125 per cent more than he asked for. Of greater significance, perhaps, is the interest rate at which the market was willing to lend: 6.75 per cent on US$1.35 billion of 13-year money and 8.785 per cent on US$650 million that would fall due in 30 years' time.

Or, looked at another way, at the lower end, the rate was nearly one percentage point cheaper than the 7.25 per cent at which Dr Phillips last borrowed when he was previously in the market a year ago, which was the lowest rate at which Jamaica was able to access loans for a very long while. Several factors account for this, but together they translate to one very important idea: increasing confidence in the management of, and outlook for, the Jamaican economy.

Jamaica, for instance, has, for eight consecutive quarters - and will do so for a ninth - met its fiscal and other targets of the IMF agreement, including, critically, the primary surplus of 7.5 per cent of gross domestic product (GDP). The populists have railed against the primary balance because of the constraint it places on public spending limits and, thereby, the Government's presumption to be the driver of economic growth.

 

JAMAICA'S DEBT DYNAMIC

 

While the administration's discipline has increased the confidence of creditors that they will be paid, a more important result is the shift it has started in Jamaica's debt dynamic.

Before this agreement with the Fund, Jamaica was heading towards a Greek-style crisis. For instance, the previous administration's skittishness over following through on tough undertakings precipitated a derailment of an agreement with the IMF; markets were closed to Jamaica; bilateral partners suspended funding; and the debt ratio headed to 150 per cent. It is now around 138.5 per cent.

Indeed, the changed environment is allowing Jamaica to do something more that will have further positive impact on the debt profile. Had the country veered from the course, there would be a far less welcoming, hostile even, debt market. Dr Phillips, in the circumstances, would have been unable to grasp the opportunity to buy back the US$2.92 billion of PetroCaribe debt from Venezuela for which the bulk of the cash raised last week has been earmarked. By the Government's calculation, the retirement of this amount will clip the debt ratio by double-digit percentage points, bringing it to around 126 per cent of GDP.

This is psychologically and economically important.

While the rates on the new bonds are significantly higher than interest on the Venezuela debt, the lower overall debt ratio resulting from the buy-back should positively impact the broader spectrum of the national debt. It will cause rating agencies to improve their outlook for Jamaica's public and private debt and, therefore, the interest at which the Government and firms can borrow on global markets. In the circumstances, existing debt can be retired for cheaper ones. Or, it will just be cheaper to borrow to invest.

That's a return for discipline.