Aubyn Hill, Financial Gleaner Columnist
A reader responded to one of my recent columns and pointed out a little-noticed phenomenon which is negating the firmly promised savings which the country should expect from the financially necessary but painful exercises we call NDX and NDX2.
The negative development is the rise in Treasury yields and the impact these increased yields will have on the vaunted J$17-billion annual NDX savings.
When in February this year the financial sector was made an offer they could not refuse by the Simpson Miller administration to shave an average of a full two per cent of the interest rates on J$890 billion of domestic debt, they reluctantly accepted the no-choice offer.
The reality was stark, but they believed the promised saving of $17 billion each year to be real.
Now, that reality is beginning to look like a partial mirage.
On March 1, 2013 the average yield on the three-month Treasury bill was 5.5 per cent. About half of the local NDX debt carries variable interest rates with reset margins of 1.0 per cent to 1.5 per cent above the three-month or six-month Treasury bill rate.
The 5.5 per cent yield on the three-month Treasury bill in March has now grown to 7.34 per cent on the last Treasury bill issued on August 23, 2013.
That is an increase of 1.8 percentage points - and this increase in rates will cause a significant reduction in the promised saving on the NDX product.
A similar trend has been recorded for the six-month Treasury. The average yield is now 8.13 per cent, which is a rise of 2.4 percentage points from 5.7 per cent when NDX was announced.
Given that the projected savings will now be cut by almost half, there will be negative implications for the budget deficit and a knock-on effect on the IMF agreement.
While the NDX scheme applied only to the Jamaican dollar (JMD) denominated portion of our large and unmanageable debt stock, the bad news is not limited to our JMD debt.
The Financial Times reported last Friday that "Government borrowing costs in the US and Europe have surged as investors become more optimistic that the developed world has embarked on a period of sustained, rapid growth and anticipate central banks raising interest rates earlier than had been previously expected".
This means that any US dollar-denominated debt, or indeed any other hard currency GOJ debt that carries a variable rate - for example, LIBOR plus an interest spread - will cost more to Jamaica and Jamaicans in interest payments.
The reduced savings on NDX debt and the increased cost of the foreign-currency denominated loans will weaken our fiscal position and very likely increase poverty.
In trumpeting those promised savings, the Government either ignored the caveats from technocrats about the debilitating effects the then probable - now real - rise in interest rates would have on the projected savings, or the technocrats failed badly as advisers to their political bosses.
The story of our sinking NIR reserves is sad and harbours significant risk for the value of the Jamaican dollar against foreign currencies, especially the US dollar.
One can expect the Jamaican dollar to face more depreciation pressure.
The Bank of Jamaica's data confirms that after two consecutive months of decline the NIR was US$882 million at the end of August. This was a decline of US$48 million from US$930 million at end-July.
The unnerving piece of data is that the NIR has fallen by US$244 million since January and is now at the second-lowest level in more than 10 years.
The Bank of Jamaica estimates that at current prices the NIR is capable of purchasing less than 11 weeks of imports. The international benchmark is for the NIR to be capable of purchasing at least 12 weeks of goods and services.
Jamaica's decreasing NIR and weakening currency position put us in a queezy economic zone.
One possible serendipitous result of the falling Jamaican dollar and the squeezed NIR is the reduction in our import bill. The biggest drop was in the import of mineral fuels and related material.
We bought less coal, coke, briquettes and gas during the period January to May 2013. Our overall purchases of these commodities decreased by 16 per cent - from US$1,143.5 million for the same period in 2012 to US$960.8 million in 2013.
A similar reduced import result was recorded with our CARICOM trading partners, from whom we bought 13.5 per cent of our total imports in 2013.
In the first five months of 2012, Jamaica imported US$454 million from our regional neighbours, but in 2013 we reduced that foreign currency expenditure to US$362 million - a cut of about 20 per cent or US$92 million from the previous year.
Regrettably, traditional exports such as mining, quarrying and manufactured products fell by US$35.4 million for the five-month period in 2013 compared to 2012, from US$383 million to US$348 million in 2013.
While there was an increase in non-traditional exports in 2013 - from US$314.5 in 2012 to US$335.2 million this January to May - the US$20.7 million or 6.6 per cent increase was not sufficient to offset to reduction in traditional export.
BACK TO GROWTH
It is a sign of the absence of economic growth in the Jamaican economy and the resulting continuing depreciation of the Jamaican dollar tied to the substantially reduced confidence in government securities and the government economic policies why our interest rates are rising.
Holders of GOJ securities are demanding higher rates for the perceived risk that surrounds these bonds in response to JDX, NDX and NDX2.
The continuing downward spiral of our production output, exports and overall efficiency have forced creditors to the Government to raise their lending rates.
This upturn in borrowing rates has begun to feed into private-sector firms.
Last week, Scotiabank made a public announcement of its increased borrowing rates to its customers and it cited the cost of NDX as one reason for the increase.
Conversely, the increase in bond and other borrowing rates in the US and Europe is a result of what is expected to be a period of sustained growth - maybe anaemic at first in Europe - in these economies.
Oh, that economic growth was the reason for our more costly funding rates in Jamaica.
Expected big-project Chinese money will no doubt help the inflow of foreign funds, but will this influx foster sustained economic growth?
We need to see from our political and business leaders a well thought out economic growth plan, which includes a reduction in energy cost and a diversification of supply of our energy product.
We also need a conversion of our education spend into the financing of a more useful national, and internationally sought-after, knowledge product and qualified knowledge workers.
We need to create a really vibrant import-substituting agricultural and agro-processing sector.
No growth means more economic and financial pain, and increased poverty.
Aubyn Hill is the CEO of Corporate Strategies Limited and was an international banker for more than 25 years.Email: email@example.comTwitter: @HillAubynFacebook: facebook.com/Corporate.Strategies