By Al Edwards, Business Co-ordinatorUNITED States-based investment banking and securities brokerage firm Bear Sterns' managing directors Greg Fisher and Carl Ross were in Jamaica earlier this week and were positive on their outlook on Jamaica.
Below is Bear Sterns' assessment of the Jamaican economy:
We have been recommending Jamaica as 'outperform' since January. Based on a trip to the country this week we remain comfortable with that recommendation. This is a change in view from the second half of 2003, when we foresaw trouble in the fiscal accounts and were observing foreign reserve levels falling. Jamaica is trading at yields that are significantly higher than other single-B credits in emerging markets (Brazil, Turkey, Pakistan, Lebanon, Indonesia, Ukraine). We are very comfortable with a 12-month horizon in Jamaica. Severe fiscal challenges cause us to be more cautious about a longer term outlook.
KEY CREDIT DEVELOPMENTS:
Partnership for Progress
This is the key development happening in Jamaica right now. Basically, it is a social consensus around economic and financial policy that recognises that most major segments of society need to take some sacrifice to lift the country out of its debt trap. The programme has some traction and momentum behind it. It involves wage restraint, tax reform, central bank reform, divestment of state assets, and a voluntary debt swap of domestic debt. This process has essentially 'bought' the government one more year that under normal circumstances the market may not have given them, considering the worse-than-expected fiscal outcomes.
Wage Agreement
Last week the Ministry of Finance (MoF) and the major unions reached an agreement on public sector wage increases. Increases will be held at three per cent per year for two years. Inflation was over 14 per cent in 2003 and the target for 2004 is nine per cent, so this is a major concession from public sector workers, in return for no mass layoffs. It will save the government about one per cent of GDP in fiscal costs in FY2004/05.
Debt Swap
The debt swap proposed by the local financial community proposes swapping high coupon domestic debt maturing in the coming quarters into longer term, lower coupon debt. The idea is to engineer the swap in an NPV neutral way that will create fiscal room in the short run, but would necessarily add to the debt in order to keep it NPV neutral. The Ministry of Finance appears to be giving this swap a cool reception. The MoF wants to ensure that the swap can in no way be seen as forced, so as to be considered a form of default. In addition, with the fall in interest rates and the issue of a EUR200 million bond in late January, the MoF's current cash flow situation is liquid.
Economy
The economy grew only 2-2.5 per cent last year. The official numbers are showing a painfully slow recovery in Jamaica. The tourism sector is in a mini boom. Stopover arrivals were up 6.6 per cent in 2003. Cruise passenger arrivals were up by 30.9 per cent. In January, stopover arrivals were up 7.9 per cent y-o-y.
Interest Rates and the Exchange Rate
Interest rates are moving down quite aggressively. The 6-month Bank of Jamaica (BoJ) repo rate is currently at 16.25 per cent, down from 33 per cent one year ago. The exchange rate has been stable and foreign exchange reserves are rising. This is all good for the debt dynamics (See our Nov. 2003 report entitled 'Jamaica: Analysis of the Debt Dynamics').
Bottom Line
Jamaica is by no means out of the woods, and the debt dynamics will look precarious for a long time to come. However, the variables are moving in the right direction, the BoJ has ample foreign exchange reserves to meet debt service, and the spirit of cooperation between the private sector and government makes a default scenario highly unlikely over the next 12 months. Jamaica has been pulled back from the brink. We recommend a Jamaican buy.
Commenting on this latest pronouncement on the Jamaican economy, George and Branday's business development manager Keith Collister said: "I believe both the local and international market have factored in some significant probability of action on the budget deficit partially as a result of the P for P initiative. If the international markets are in fact waiting for the positive sign of the debt swap, it will therefore be important that we go ahead with the swap from a 'confidence and credibility' perspective."
