Al Edwards, Business Co-ordinator
THE PRIVATE Sector Organisation of Jamaica (PSOJ) instigated Partnership for Progress is looking to the Government to significantly lower its interest cost on the national debt by swapping high cost Government paper into low cost US indexed bonds. It has been proposed that investors will be paid in Jamaican dollar equivalents.
Speaking to Wednesday Business last night a leading member of Partnership for Progress said: "Let's make it clear right here right now that this is not a debt restructuring exercise, investors will not be giving up value. We are advocating increasing the use of indexed bonds in the mix of debt which lowers the average cost of debt. This swap represents only about 10 per cent (J$25 billion) of the country's debt and the Government has somewhere in between US$700 to 800 million worth of indexed bonds on its books."
INITIATIVE
This latest initiative is believed to have been the brainchild of TankWeld's Chief Executive Officer Christoher Bicknell. Partnership for Progress, is an alliance of representatives from the private sector, the trade unions , academia, civil society, Government and the Opposition created to formulate a plan to adjust the country's fiscal accounts.
This attempt to address the high cost of debt would mean that the Government takes the currency risk with the upside being that the Government pays significantly lower interest costs. Government instruments now yield interest payments of between 20 and 30 per cent whereas US indexed bonds yield interest payments from high single to low double digits.
A leading player in the financial sector talking under anonymity said that swapping into US indexed bonds should save the Government between $4 to $7 billion a year.
Commenting on this latest initiative the Chief Financial Officer of Grace Kennedy Don Wehby said: " I think that it is very important that the private sector takes a stance on our escalating debt, the fiscal deficit and the huge wage bill. I think that this swap will help us. If the Government accepts this initiative it will send a clear signal that it really wants to have a relatively stable exchange rate. There are certain preconditions that the Government must accept and if it does it gives a clear signal that it wants to seriously address its financial problems."
Managing director, Sterling Asset Management: "I don't know too much about this swap but think about this- if you have a 30 day repo at 20 per cent it will be very difficult to convince an investor to accept 6 per cent. The question is how do you swap the underlying security. What happens when the client wants to cash in. What this amounts to is dollarising the domestic debt and is this wise given its size? It is important how foreign investors view our debt. This swap will spell a jump in our foreign debt which means we become more exposed."
George & Branday's Business Development Manager, Keith Collister: "Standard & Poors and Moody's do not regard the issuance of indexed bonds as very different from straight US dollar denominated debt. The interest cost savings of the proposed swap should administer a positive confidence shock to both local and international investor appetite for Jamaican assets. However increasing the dollarisation of the Jamaican debt stock could be viewed by the international capital markets as increasing our vulnerability to shocks. Therefore a careful analysis of the optimal capital structure for Jamaica should be a key part of the process."
FIXED INCOME INSTRUMENTS
Barita Portfolio Management's managing director, Peta-Rose Hall: "Jamaicans invest heavily in fixed income instruments and they are accustomed to getting high rates. Generally US indexed bond are well received here and I don't see investors responding any differently. The Jamaican dollar has devalued by 10 per cent per annum and with the rate of these US indexed bonds coming in at around 10 per cent, it is a good return. It is better to get into these bonds in Jamaica than go over to the United States and invest over there because you are guaranteed a better return- that as long as these bonds don't offer a rate of around 4 or 5 per cent."
