By Al Edwards, Business Co-ordinatorTHE JAMAICAN economy had one of its best weeks for many a year this week. On Wednesday it was announced that the Government had successfully raised 200 million euros (US$253 million) in a sale of euro-denominated bonds on the open market. The Minister of Finance and Planning, Dr. Omar Davies has repeatedly said that he would go to the international capital markets at the appropriate time.
The new bond is issued with a coupon of 10.5 per cent. Interest will be accrued from February 11,2004 with the first interest payment due on February 11,2005. The bond matures on February 11,2009.
The issue was managed jointly by Commerzbank and Deutsche Bank of London England.
The Financial Gleaner understands that the size of the issue was increased from Euro 100 million to Euro 200 million as the former amount was oversubscribed.
Jamaica has a Euro 175 million bond maturing in August 2004, which the new issue is expected to finance.
The new bond should ease some of the country's fiscal liquidity and help boost the Net International Reserve (NIR), which stood at US$1.16 billion at the end of December 2003. The NIR is now likely to be in the region of US$1.3 billion by the end of this fiscal year (March 2004). Jamaica's return to the international capital markets is likely to inspire confidence in the stability of the local currency despite a challenging debt and fiscal situation.
POSITIVE NEWS
The country's fiscal balance was estimated to be $5.1 billion below budget (a deficit of 6.2 per cent of GDP) through the first eight months of the fiscal year with a debt/GDP ratio of 150 per cent. Commenting on this positive news and latest coup by Dr. Omar Davies, George & Branday's Business Development manager, Keith Collister told the Financial Gleaner: " The Partnership for Progress initiative has lead to a recent firming in the US dollar denominated Euro bond prices. International market investors would normally require a trend of rising bond prices to encourage them to buy into a new issue. The Minister of Finance has had this issue in the works for some time. The improvement in market sentiment due to the Partnership for Progress initiative might have allowed this issue to be launched where others have been unable to be launched over the past year.
BEAR STEARNS
COMMENTARY ON JAMAICA
Carl Ross,Senior
Managing Director
The balance of the news coming out of Jamaica is positive. In early January, we revised our recommendation on Jamaica to outperform, from underperform. We continue to caution that Jamaica's debt dynamics are a major credit constraint, but the economic news has turned more positive in recent weeks, enough, in our view, to warrant cautious optimism, especially in light of the very favourable global liquidity backdrop. Following are some highlights:
Partnership for Progress -- this is a social consensus effort that is being driven by the private sector and involves, if successful, a tripartite agreement from private sector (voluntary debt swap), unions (wage restraint), and government (yet to be determined policy measures). As we have written in the past, we think this demonstrates that Jamaicans are not yet at the point of capitulation, and are willing to help themselves (outside of an IMF programme). At minimum, this buys Jamaica much-needed time. We await for the government to sign onto this programme with strong policy measures before we can determine its ultimate usefulness.
Euro bond issue -- today's announcement that Jamaica will issue bonds in Europe (EUR100-175 million) is a positive signal. The country has not issued debt internationally since June of 2002, despite a couple of attempts. At 10.645% price talk, this 5-year bond is priced extremely attractively for investors. In addition, the market is extremely receptive to yield stories at this time. Nevertheless, if successful, it would be a demonstration that Jamaica has access to foreign capital -- an important signal.
Interest rates -- the Bank of Jamaica is cutting interest rates, which is supportive of what the local community is trying to achieve. High interest rates have been choking any nascent recovery in the economy. Today the BoJ reduced rates again on its open market instruments by roughly 100 basis points across the curve. Since their peak in March 2003, 180-day rates have fallen by 1490 bp to 18.25 per cent. More importantly, the pace of rate cuts has accelerated in the past 6 weeks.
Foreign reserves -- the BoJ recently released NIR for end-December 2003. The figure was $1165 million. The NIR have been climbing modestly since reaching a low of $1,080 million in August 2003. This represents just over 3 months of imports of goods and services.
Real economy -- the numbers on the economy are difficult to interpret. Official GDP figures show an economy that is still growing at less than two per cent. Anecdotal evidence, however, points to a higher rate of growth. Tourism was strong in 2003, and bookings are very solid for the current tourist season. The bauxite industry is also performing better than it has in several years. Imports have been strong, indicating high incomes and domestic growth. The economy "feels" like it is growing faster than the official numbers indicate, but without better data, it is difficult to be definitive.
Fiscal and debt dynamics -- this is still the biggest concern. The government will almost certainly miss its fiscal target of 5-6 per cent of GDP for FY2003/04, perhaps by a significant amount. However, most of the explanation for the missed target will be higher-than-expected interest cost. Therefore, if the debt swap envisioned in the "Partnership" can be engineered, the government may be able to make a credible commitment to get the fiscal programme back on track for FY2004/05, despite having missed its fiscal target by a significant amount for two years running.
HUGE CHALLENGE
Fiscal policy will continue to be a huge challenge. Schools and hospitals do not have enough money, government infrastructure spending has been cut to the bone, and debt service will remain vulnerable to interest rate and exchange rate shocks.
Gregory Fisher's Comments (Bond Trader, Bear Stearns)
Great day for Jamaica... Deutsche's deal closed nicely... the market saw solid buying into the issue once it was free to trade and my gut tells me that when Europe opens up in the morning that the 09s could see the price go much higher. Many clients have been asking me why so many non-Jamaicans are now looking to buy $200 million worth of Jamaica's debt and I think that this buying can be summed up easily by pointing out that many institutions are yield-hungry. Given the fact that the FED doesn't seem to be ready to hike rates anytime soon, many institutions are scrambling to find yield within the market place. And when you add this fact to the positive prospects for "The Partnership for Progress", there is reason for cautious optimism relative to other high yielding sovereigns. Now it is up to the Government down there to make sure the wind continues to fill the sails and if this happens, I think the non-Jamaican investor money will continue to follow. Having seen today's (Wednesday's) reaction in addition to the recent non-Jamaican buying of the existing USD$ Globals, one has to believe that the Jamaican issues will only move higher in the near-term. Let's cross our fingers and hope that Jamaica can stay in this positive direction. These are my opinions, and as always, take them as such.
INTEREST RATE REDUCTION
On the same day that it was announced that the Minister of Finance had successfully raised Euro 200 million, the Bank of Jamaica reduced interest rates on its open market instruments. The central bank cited continued stability in the foreign exchange market supported by improved foreign exchange flows, particularly from the tourism and mining sectors. It also cited the recent price performance of Jamaica's externally issued bonds and the favourable outlook for emerging market debt as reasons for lowering interest rates. The current reduction is the eighth such reduction since rates were at 35 per cent in March 2003. Rates will still have to be reduced in order to reduce interest costs for the 2004/2005 fiscal budget.
GDP GROWTH
Third quarter GDP figures , also released on Wednesday indicate that the Jamaican economy grew by 1.6 per cent (year-on-year) during the third quarter of 2003, compared with the preliminary estimate of 1.2 per cent by the Planning Institute of Jamaica (PIOJ). However, this was less than the 3.1 per cent originally projected. Jamaica is likely to achieve GDP growth of 2.1 per cent for calendar 2003, if the fourth quarter GDP is 2.0 per cent, given 2.8 and 2.2 per cent for the first and second quarter respectively, according to JMMB's research department.
The Jamaican economy has benefited on the one hand from rallying world aluminium prices, but is being hurt by surging world crude oil prices.
