Sat | Jan 20, 2018

Briefing | Medium term debt management strategy - Risks associated with foreign currency debt expected to remain high

Published:Wednesday | March 15, 2017 | 12:00 AMDr Andre Haughton


What is the medium-term

debt management strategy?


The Budget Debate continues and the Government has outlined its medium term debt management strategy. It shows their obligation to minimise the cost associated with Jamaica's borrowing requirements over the medium term. An annual borrowing plan is designed in the strategy aimed at reducing the cost associated with borrowing and reducing the national public debt to a sustainable level.


What is Jamaica's current stock of debt?


At the end of December 2016, Jamaica's total stock of public debt (current Government of Jamaica definition) stood at $2,150.0 billion, showing a 3.9 per cent increase of $81.3 billion over the $2,068.7 billion recorded at end-FY2015/16. According to the strategy outlined by the Government, the stock of debt is expected to increase further by the end of March 2017 to $2,180.3 billion. Of the total debt stock, the external debt stock holds the highest portion, which stood at $1,315.7 billion at end-December 2016. The external debt stock continued to be the larger portion of total outstanding debt, and accounted for 61.2 per cent, while domestic debt of $834.3 billion accounted for 38.8 per cent. The domestic and external portfolios grew by 2.3 per cent and 5.0 per cent, respectively.


Why did the debt stock increase?


The increase in the domestic debt stock was mainly due to the issuance of additional investment instruments, while the increase in the external portfolio was due to the depreciation of the Jamaica dollar vis-·-vis the US dollar. The depreciation of the nominal exchange rate increased the total domestic and external portfolios by $3.4 billion and $65.5 billion, respectively. The exchange rate accounts for more than 84.8 per cent of the overall increase in the total debt stock. Total new debt was $37.3 billion, and inflows to the domestic portfolio were to the tune of $26.6 billion. A 1.0 per cent depreciation of the Jamaica dollar vis-·-vis the US dollar would add $13.8 billion to the total debt stock, and a 1.0 per cent uptick in both domestic and external interest rates would increase debt service costs by $7.4 billion.


What is the objective of the medium-term debt strategy?


The main objective of the strategy is to create a portfolio which will best minimise costs and mitigate risks in the medium term. According to the strategy, the Government continued to benefit from low interest rates in the domestic market, as the interest cost associated with variable-rate domestic debt remained flat due to low T-bill rates. New fixed-rate issuances also benefited. The US LIBOR rate, however, increased in the external markets. The external portfolio was cushioned, as most external loans were contracted on a fixed-rate interest basis. The Government outlined that they were able to mitigate risks associated with refinancing during the review period. Management of the foreign currency risk was difficult due to the significant proportion of the portfolio denominated in foreign currency. The portfolio continued to increase in Jamaica dollar terms due to depreciation of the Jamaica dollar vis-·-vis the US dollar.


What does the interest rates

look like in the market for loans?


According to the strategy, the average interest rate of the total outstanding debt remained unchanged at 6.1 per cent at end-December 2016 when compared to end-March 2016. Similarly, the average interest rates of the external and domestic portfolios were unchanged at 5.3 per cent and 7.4 per cent, respectively. The Weighted average Treasury Bill Yield for the one-month T-bill trended up from 5.37 to 5.47 at the end of the first quarter of the fiscal year, and then remained relatively stable at 5.64 at end-December 2016.


What is in store for the future?


The country has the potential to generate enough foreign revenue to clear its debt if it takes the ganja industry seriously. New revelations have shown that the industry has brought significant revenue to states in North America and other countries to help alleviate their debt problems. The results of the debt-management strategy indicate that risks associated with foreign currency debt will remain high, but is expected to fall by 2020. They project that total foreign currency debt will fall to 60 per cent of total debt by 2020 and foreign currency domestic debt to six per cent of total debt. Plus the following risks to the macroeconomic framework:

- Revenue and economic growth weaker than projected.

- Fiscal riskswage settlements, unbudgeted expenditures, judicial awards, public-private partnerships.

- Exogenous shocks causing fiscal slippage.

- Increases in international commodity prices that could drive the domestic inflation rate upwards, in particular, rebounding global oil prices that could adversely affect the cost of energy.

- Sustained reduction in the NIR.

- A deterioration in the international trade balance.

- Higher than projected depreciation of the local currency vis-·-vis major international currencies.

- Increase in unemployment.

- Extended and severe drought conditions and poor farming practices.