What PetroCaribe debt buy-back means for Jamaica
What is the PetroCaribe debt?
The PetroCaribe development fund is an agreement between Venezuela and Jamaica that provides loan financing to the Ministry of Finance and Planning and self-financing public bodies for development projects that are desperately needed.
The arrangement is very extensive and involves Jamaica receiving oil up front in some instances and paying for it later. Discussions surrounding the sustainability of the PetroCaribe arrangement increased after the death of the former Venezuelan President Hugo Chavez. Loans under the PetroCaribe agreement are very accommodating and are generally furnished at low interest rates between one and three per cent per annum. Some of these loans have reached or are near their maturity periods and Jamaica has not been able to increase economic activity to generate enough revenue to repay the debt on its own.
Why the bond issue?
Jamaica is in the process of issuing bonds with two different maturity periods to raise funds to repurchase the PetroCaribe debt owed to Venezuela. The bonds, which are expected to raise US$2 billion in total, is divided into two separate issues; one expected to raise US$1.35 billion maturing in 2028 with a yield of 6.75 per cent, and the other which is set to generate US$650 million maturing in 2045 with a yield of 7.875 per cent. Jamaica will use the proceeds from the bonds to repurchase $3 billion worth of debt owed to Venezuela at a discounted price of $1.5 billion. The remaining US$0.5 billion I assume will strengthen the reserves.
What are the advantages of the bond issue?
The decision to repurchase its own debt apparently at a discounted value has been praised by the International Monetary Fund and other international creditors as a move in the right direction in the country's effort to reduce its total debt burden. As of May 2015, Jamaica's total public debt stock was J$2.04 trillion, of which US$8.51 billion is external debt. The new bond issues were oversubscribed to the sum of $4.5 billion, way more creditors willing to lend to the Jamaican Government than originally anticipated due to an increase in Jamaica's credibility on the international financial markets.
It appears that the debt buy back at a discount rate will save Jamaica on future debt-servicing payments on an annual basis since the country now has a lower stock of debt after the deal is finalised.
What are the disadvantages of the bond issue?
Yes, it is good that Jamaica can access funds on the international lending market once more to the extent that the issue is oversubscribed by lenders. However, issuing bonds to repay debt is a tricky scenario because the Government will have to raise funds to repay these bonds plus interest when they mature in 2028 and 2045. If the country does not grow at an increasing rate from now onwards, it is highly unlikely that the Government will generate enough funds to service these bonds when they mature, which means they might have to issue more bonds to repay debt, trapped in a borrowing cycle. The new bond issue buys the Government time to think of a more sustainable strategy to combat Jamaica's high debt problem rather than issuing bonds to repay debt.
The Jamaica economy has been improving marginally on the books, but very little has improved in real life. Many are trapped in a low income, high expenditure cycle, which is limiting the transfer of money from one hand to the next and lowering aggregate demand as a result. There is an agenda to increase export, but this is futile if there is not agenda to substantially increase output across the board. Manufacturing is an important component in the country's mix of exports; however, it is still too expensive to manufacture goods in Jamaica due to the high cost of energy. This has constrained the country's diversification and expansion of these manufactured products.
Furthermore, not enough value is added to imported inputs such that exports can fetch a higher price globally. High energy costs also prevent manufacturers from capitalising on economies of scale where it might exist. Something has to be produced in excess before it can be exported to generate enough revenue to sustain the country's borrowing habits.
n Dr Andre Haughton is a lecturer in the Department of Economics on the Mona campus of the University of the West Indies. Follow him on Twitter @DrAndreHaughton; or email