Keith Collister, Business Writer
The investment bank, Bear Stearns, says that it expects Jamaican bonds - buoyed by strong economic data, a favourable political climate and the absence of major storms during the hurricane season - to outperform its specialised BSEMIX index for emerging market debt during the coming quarter.
Earlier in the year Bear Stearns had downgraded Jamaican debt from outperform to market perform during the second quarter because of fears of a violent spiral in oil prices and predictions of an active and potentially dangerous hurricane season. There were concerns, too, that general elections, which was then widely expected to have been held before yearend, would create political instability.
But these things have not come to pass.
In recent weeks oil prices have fallen back from their highs of months ago, the hurricane season is ending quietly for the island and it now seems likely that Prime Minister Simpson Miller, faced with the Trafigura party financing scandal, will not go to the poll until after the Cricket World Cup tournament next March.
Debt to outperform market
In the face of these developments, Bear Stearns, in its recommendation this week, said that it believes that Jamaica's debt will outperform the market in the coming quarter.
Bear Stearns is not an international rating agency, such as Standard and Poors and Moody's, who basically assess the ability and willingness of countries and firms to pay their debts. The investment bank is instead the leading international broker in Jamaica's debt and their recommendation is likely to affect the price at which the island's debt trades.
Bear Stearns defines its market perform recommendation to mean "the country is likely to perform in line with the BSEMIX over the coming three months," whereas outperform means the debt would return above the same index. Categorisations of outperform, market perform and underperform recommendations are forecasts of price appreciation roughly analogous to recommendations to a buy, hold or sell on a stock.
The BSEMIX (Bear Stearns Emerging Market Index) is an alternative index of emerging market debt prices (constructed by weighting the outstanding international traded debt of the countries included in the index ) to the better known EMBI (Emerging Market Bond Index) of international investment bank JP Morgan.
Sovereign debt index
At the beginning of the year, Bear Stearns forecast that its index of sovereign debt would tighten by 30 basis points - the equivalent of 0.3 per cent as each basis point represent one hundredth of one percent - to trade at a spread of 180 basis points over U.S. treasuries. According to Bear, this is the equivalent of 200 basis points over U.S. Treasuries, using the EMBI. Emerging market debt typically trades at a spread over safe U.S. Treasuries reflecting their higher risk.
Using the BSEMIX, the spread of emerging market debt was trading at 190 basis points (near its all-time low) above U.S. Treasuries at the end of September, but has tightened further in the month of October.
In its review of Jamaica, Bear Stearns cited as positives:
the improved primary surplus (budget surplus before interest costs);
falling inflation;
the possibility of growth going above three per cent in the coming quarters; and
an assessment that there was very little risk of "austerity fatigue" breaking Jamaica's willingness to pay.
On the negative side, the investment bank noted the debt burden "remains crushing" with debt interest consuming 42 per cent of Government revenue, double the amount spent on programmes and more than five times capital expenditures.
- business@gleanerjm.com
