Dennise Williams, Staff reporterVICIOUS SELLING off of emerging market debt by investors in the United States including Jamaica's international debt, a primary source of funds for the national budget, brings into question whether local interest rates will increase because Government might be forced to borrow locally.
As investors dump Jamaica's bonds, the Government may have to pay very high interest rates, as high as 12 per cent, to lure international investors to lend them money. And its not just Jamaica's bonds being dumped.
The emerging market includes countries such as Russia, Turkey and Brazil. Charles Ross, managing director of Sterling Asset Management states, "Prices are very volatile in the emerging market. In the last two weeks, prices have dropped to levels not seen in four years."
BETTER THAN EXPECTED GROWTH
The sell off is a result of the better than expected growth in the Unites States job market which has led investors to believe that interest rates will rise. And if interest rates in the US rise, then US bonds will be more attractive and far safer than more risky emerging market debt, including Jamaica's.
According to Bloomberg news reports, international securities trading firms such as Bear, Stearns state, "After the report (on job growth in the US) that they expect the Fed (the U.S Central Bank) to raise its benchmark overnight rate from a 45 year low of one per cent at next month's meeting." Bloomberg continues, "Prices (on emerging market debt) have dropped as hedge funds that borrow in the U.S to lend at higher rates in emerging markets withdraw because of higher borrowing costs.
Improvements in the ability of some emerging market countries to pay their debt, have little impact in the market at present."
But what does that mean for Jamaica?
Keith Collister, business development manager at First Global Financial Services Ltd, explains. "Locally, the recently reopened 2017 Jamaican Eurobond has borne the brunt of overseas selling as might have been expected in view of the recent increased supply."
However, Mr. Ross does not believe that the happenings in the international bond scene will have any effect on local interest rates. "I don't think that the sell off in the emerging bond market will have an immediate effect on local interest rates as they are already high. And Government borrowing does not determine local rates.
The key factor in that regard is the Bank of Jamaica. Rates move up when they decide to defend the local currency." In fact, maybe the opposite will occur. According to Mr. Collister, "Minister Omar Davies has stated at a post budget forum held at the Hilton Hotel on May 6th, that he had a preference for raising money in Euro's as Jamaicans hadn't discovered Europe yet and so it didn't affect our local currency markets. A successful issue would allow further vigorous cuts in local interest rates."
However, Mr. Collister believes that a "firming in international emerging bond markets will be required for a successful Eurobond issue."
Mr. Ross continues, "What the sell off of emerging market debt means is that the Government will have to delay re-entry into the market. Right now, US bonds, even at an expected price of 4.86 per cent, are much safer than Jamaican debt paying in excess of 10 per cent. But I expect a recovery in the international market soon." Mr. Collister agrees and sees a chance for local investors to profit from Jamaica's falling international bond prices. "We expect a selling climax in the emerging markets, which may present a buying opportunity."
