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PetroCaribe debt buy-back positive for Jamaica

Published:Wednesday | August 5, 2015 | 8:00 AM

On July 23, 2015, Jamaica raised US$2 billion on the international capital markets - the highest amount it has ever raised during a single transaction window - at the lowest rates it has ever been able to access from that market. A third of that money, US$650 million, has a term of 30 years, while the remaining $1.35 billion has final maturity in 2028, 13 years.

Among the primary reasons Jamaica approached the international capital markets to raise money was to buy back some of our outstanding debt, thereby reducing the total debt stock.

Last week, the Government of Jamaica completed a transaction with the Government of Venezuela to buy a portion of the debt owed under the PetroCaribe Energy Cooperation Agreement, using a portion of the proceeds from the most recent capital market issuance. The arrangement with Venezuela allowed the Government of Jamaica, based on the net present value of the debt outstanding at December 2014, to purchase the PetroCaribe debt for US$1.5 billion.

It is important to note that when all factors of both transactions are considered, Jamaica will spend less money for debt service of more than US$25 (that is principal and interest repayments combined), in spite of the difference in interest rates between the funds raised on the international capital markets and those paid under the PetroCaribe Energy Cooperation Agreement. This savings relate only to the direct relationship between the bond issuance and the PetroCaribe Energy Cooperation Agreement transaction.

 

significant reduction

 

This transaction is expected to reduce Jamaica's debt-to-GDP ratio by approximately 10 per cent, which is a significant reduction in this key economic indicator. Further reducing the country's debt to GDP will not only solidify our success under the economic reform programme but should improve the country's standing with the international rating agencies and make Jamaica even more attractive to both local and international investors.

The primary reason for Jamaica needing to undertake this ERP was to arrest the unsustainable level of debt the country had built up, and to create the conditions for sustained economic growth at progressively higher rates than previously experienced. The programme set the target of reducing the debt to GDP to 96% in 2020 and to 60% in 2025.

In March 2013, just prior to securing an agreement with the IMF, the public debt stood at approximately 145 per cent of GDP, including our obligations under the PetroCaribe agreement that we have with Venezuela. This was an untenable position, as it meant that the country was spending most of its limited resources to repay debt.

This situation was further compounded by the fact that both the local and international capital markets were virtually closed to Jamaica or was only accessible at very high rates of interest, and Jamaica did not have access to significant multilateral support.

The transaction is especially significant as the Government of Jamaica's partnership with the government of Venezuela under the PetroCaribe Energy Cooperation Agreement celebrates its 10th anniversary this year. It is important to note that this transaction does not mean the end of our relationship with the government of Venezuela under the PetroCaribe Energy Cooperation Agreement. Instead, the solidarity and goodwill with which this transaction was discussed and concluded has served to strengthen the relationship between both governments.

- Donovan Nelson is an aide to Finance Minister Peter Phillips. Email feedback to columns@gleanerjm.com.