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PetroCaribe debt buy-back will accelerate growth

Published:Sunday | August 9, 2015 | 8:00 AMRalston Hyman, Contributor
FILE The sum of US$500-million will likely be in the custody of the Bank of Jamaica until it is needed and will, therefore, lead to the bank having almost US$1.4 billion more in reserves than is needed under the IMF programme until February next year, writes Ralston Hyman.
Finance Minister Peter Phillips has been bullish about the prospects of net savings from the PetroCaribe debt buy-back.
Ralston Hyman
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The Government's decision to repurchase the US$$3.2 billion (J$375.5 billion) PetroCaribe debt on which it made annual interest payments of J$3.75 billion at 1% per annum and J$7.5 billion per annum at 2% per annum will lead to an acceleration of economic growth, employment creation, and development.

This, although the US$1.5 billion (J$176.0 billion) used to purchase the debt, at 46 cents to the dollar by my calculation, will attract annual interest payments of J$12.5 billion at an average interest rate of 7.1% per annum.

Here is why the PetroCaribe Development Fund (PCDF), which was established in 2006 as a result of the amendment of the Petroleum Act, is a corporate body that has its own revenue streams and assets, as well as liabilities, which will now be owned by the Government of Jamaica.

The fund generated some J$5.29 billion in interest payments and J$39 billion in principal repayments on its loan portfolio of approximately J$206 billion as at the end of the 2013-2014 financial year. This represented a return of 21% per annum on the portfolio.

This interest and principal repayment income stream will now flow straight into the Government's coffers and, therefore, the higher cost of servicing the US$1.5-billion bond used to buy back the debt will be offset by the interest and principal payments which it is generating annually.

 

DEBT SERVICE

This, therefore, means that the extra J$5.0 billion that will now be required to service the US$1.5-billion bond used to buy back the fund would come from the interest and principal payments generated into the Government's coffers annually. The top 10 borrowers from the PCDF include the Ministry of Finance (US$934.9 million), Clarendon Alumina Production (US$259.75 million), Air Jamaica (US$195.28 million), Petrojam (US$192.0 million), Port Authority of Jamaica (US$163.0 million) and Wigton Windfarm (US$99.0 million), to name a few.

The PCDF has funded projects such as the expansion of the country's rural and urban road networks, the upgrading of the Norman Manley International Airport to international standards, the Petrojam Refinery, the building of the Falmouth Pier, and the refleeting of the Jamaica Urban Transit Company.

The PCDF is, therefore, a self-sustaining fund that will continue to generate additional income into the Government's coffers. This additional income will help to compensate for the increased interest payments and, therefore, there will be no need to increase taxes in order to make these future payments.

The PCDF also plans to spend another J$18 billion to finance investments in the energy sector and other infrastructural projects during this fiscal year, from which it expects to generate additional interest income.

 

DEBT/GDP

The buy-back of the PetroCaribe debt will also help to accelerate growth, employment and development because it will lead to a reduction in the debt-to-GDP ratio of about 10 percentage points. Why?

The country's nominal GDP, which is a measure of the market value of all final goods and services produced last year, before adjustment for inflation, was J$1.56 trillion.

Under the current agreement with the International Monetary Fund (IMF), the net PetroCaribe debt, which accounts for about 8.1 percentage points, was included in the debt-to-GDP ratio of 136.7 per cent recorded last year. Removing this debt will, therefore, lead to a reduction in this vital ratio by 8.1 percentage points to about 128.6 per cent. Nominal GDP growth, or growth before adjustment for inflation, is expected to push this ratio further down to about 125% by the end of the next fiscal year.

With a lower debt-to-GDP ratio, the Government will now be able to borrow more cheaply in the international capital markets and the private sector will now be able to get better credit terms, making the economy more competitive.

 

PRIMARY SURPLUS

Reducing the debt-to-GDP ratio faster than programmed for under the IMF agreement also places the Government in a better position to successfully conclude the negotiations with the IMF to reduce the primary surplus from the current level of 7.5% of GDP from a purely technical standpoint, since it is determined by the debt-to-GDP ratio. A lower debt-to-GDP ratio would suggest that lower and more manageable primary surplus is necessary.

Lowering the debt-to-GDP ratio by one percentage point, to 6.5%, would lead to interest savings of J$17.5 billion annually, while a two-percentage-point reduction would result in savings of J$35.0 billion. These additional flows would help the Government to increase the level of investments in the country's capital stock irrigation systems, water supplies, rural farm roads, business process outsourcing facilities, solar energy plans, national security and justice, small-business development, and education and training, particularly to combat the high levels of youth unemployment.

 

NDX PAYMENTS

The additional US$500 million that was raised has been earmarked to repay the J$62 billion in National Debt Exchange (NDX) bonds that will become due in February next year. This means that there will be no rollover, and this will place the country firmly on a low interest rate path that would force the banks to fund real sector productive activities such as businesses, construction, energy, business process outsourcing, agriculture and manufacturing, as well as export development, which will lead to an acceleration in economic growth, employment creation, and development.

This US$500 million will likely be in the custody of the Bank of Jamaica until it is needed and will, therefore, lead to the bank having almost US$1.4 billion more in reserves than is needed under the IMF programme until February next year. The bank will, therefore, now be in a position to reduce the rates on the benchmark 91-day and 182-day Treasury bills from 6.44% per annum and 6.55% per annum, respectively.

Approximately 35% of Jamaica's total debt of J$2.04 trillion is issued at a variable rate or at a rate that changes with market conditions.

That amounts to J$714 billion and, therefore, a one-percentage-point reduction in these rates would lead to interest savings of J$7.14 billion per annum and a two-percentage-point reduction would result in savings of J$14.28 billion per annum. It is, therefore, clear from the above analysis that the game-changing PetroCaribe debt buy-back places the country on a firm path and trajectory for accelerated economic growth, employment creation and employment, contrary to what the parliamentary Opposition is saying.

- Ralston Hyman is a business reporter working with Power 106 FM. Email feedback to columns@gleanerjm.com and realbusiness@power106-ja.com.