Tue | May 23, 2017

Editorial: Seek more debt buy-backs

Published:Wednesday | August 12, 2015 | 8:00 AM

Aubyn Hill and Fayval Williams, who have emerged as Andrew Holness' key economic advisers, ought to be commended for stimulating a public debate on the Government's debt buy-back agreement with Venezuela, the efficacy of which they do not apprehend and believe to be non-existent.

For while they may have got their sums wrong, and government officials may be frustrated by their challenge, such policy debates are good as long as you don't get too wrong-headed with them.

For the record, this newspaper repeats its position that the deal is good for Jamaica. The Government has paid US$1.5 billion for US$3.25 billion that it owed Venezuela for oil purchases under the PetroCaribe energy accord.

Jamaica paid interest at one per cent of the Venezuelan debt. The cash that it will use to clear it was borrowed at more than six per cent. That, on the simple argument, is not a good exchange. That is, until you do some more arithmetic.

Over the 25 years that it would have required to clear the PetroCaribe debt, the Government would have had interest payments of around US$394 million, calculated on the reducing balance of the debt. It would also have paid off the principal for a total outflow of around US$3.6 billion. With the new bond, interest payments over 30 years will amount to a little under US$1.6 billion, which, with the principal, will mean a total cash outflow of close to approximately $3.1 billion.

The upshot is that despite an approximate US$1.2-billion increase in interest payments, the nominal cash-flow gain for Jamaica, taking into account the fact of the saving on principal, is over half a billion, which, ultimately works its way into a US$300-million net present value gain to the country over the life of the bond.

That's not the full story. The debt buy-back also means a 10 percentage-point drop in the ratio of debt to gross domestic product (GDP), bringing it down to around 126 per cent. Not only is the decline fortuitously faster than what is programmed under the country's agreement with the IMF, but the fall should lead to an improvement in the country's credit rating. The Government and firms should be able to borrow at lower rates, and improved confidence in the island's macroeconomic environment will possibly make Jamaica a more attractive place for investors.

 

lighter cash-flow demands

 

Further, because the replacement bond requires no payment on principal until after the first decade, the cash-flow demands are softer than the PetroCaribe arrangement, although the bulk of principal will have to amortised soon thereafter. The authorities, in the circumstance, should have time to adequately prepare for that eventuality, including putting the economy in a position to manage such burdens.

There is another aspect of this deal that ought not to be overlooked: the future of the underlying debt that the Government has acquired at a discount. That demands scrutiny going forward. While the US$3.2 billion is no longer officially part of the portfolio of the PetroCaribe Fund, the various government-related enterprises and agencies to which it loaned the cash still have an obligation to pay, which must be adhered to in order to help ensure that bondholders are paid.

Having done this deal, the technocrats should be scouring their portfolio of debt and talking to other lenders to determine who else might want a payout at a discount.