Jamaica's recent expensive borrowing success
Aubyn Hill,Financial Gleaner COLUMNIST
At the end of June to early July of this year, there was a great deal of euphoria on the part of Cabinet members and many vocal People's National Party supporters when Finance Minister Dr Peter Phillip, his technical team and roadshow managers returned from Europe and announced that he had secured a new US$800-million loan.
The joy was almost palpable when the country was told, with a measure of triumph, that a 10-year bond was priced at 7.625 per cent, which was below the expected interest rate range of 7.75 per cent to 8.0 per cent.
I travelled through London at about the same time Peter Phillips and his team were there, and some sources with whom I spoke left me with the impression that there was some surprise when the minister returned with a deal at all. The idea was to test the market.
The trip to European capitals in mid-to-late June and the one to New York earlier in the same month were billed as non-deal roadshows. This means these trips were essentially to bring new information on Jamaica's latest economic performance up to that point, especially since our engagement with the International Monetary Fund about a year earlier.
Engagement in these discussions would provide the minister, Bank of Jamaica Governor Brian Wynter, Financial Secretary Devon Rowe and other government officials the chance to test the kind of reception the Jamaican paper would receive from prospective bond investors.
The reception from the market was good.
Dr Phillips was made aware that Brazil, Peru, multiple defaulter Ecuador, and Kenya - a country with credit conditions similar to ours in Jamaica - found quite receptive responses in the international bond market. He decided to pull the trigger on the decision, and for a larger amount than was originally planned.
In the banking business, we always say that the costliest asset on the bank's books is unutilised cash in a vault. Well, having pulled the trigger Dr Phillips has a lot of Jamaica's cash sitting quite idly in some rich foreign bank's vaults - from which they are earning profit.
The numbers are like this. We borrowed US$800 million at an interest rate of 7.625 per cent. Given the prevailing low interest rate paid by international banks for USD deposits, we are probably earning about one per cent per year. If we were to buy 10-year US Treasuries, they are paying about 2.34 per cent per annum. So we pay 7.625 per cent per year for the new loan (bond) and earn one per cent per year when we deposit the loan proceeds in a foreign bank to keep until we use it to pay maturing older debts.
So if all the money were placed on fixed deposits, the differential in cost to Jamaican taxpayers would be 6.625 per cent per year, or US$53 million each year. That works out to US$4.417 million or J$498.238 million per month at today's exchange rate. That is a hefty sum for pulling the trigger early - if that is what was done.
Even if the Government placed all the funds in US 10-year bonds at 2.34 per cent per year - this is unlikely, these funds would generally be kept in a mixture of US dollar deposits and US Treasuries - the cost differential would be 5.285 per cent per year. The annual cost to local taxpayers would be US$42.28 million a year, or US$3.52 million monthly, which translates to J$397.056 million per month.
And neither the US$4.417 million nor the US$3.52 million per month would be the total cost to the taxpayer. Fees and expenses for the foreign institutional advisers and roadshow managers could range between another three to five per cent.
The argument has been made that the timing was right in the market, so right in fact that our request was hugely oversubscribed. But we have to pay about J$500 million every month for that privilege.
The counterargument could be, why the rush when the Eurozone was deflating, Japan was trying to reflate because of its decades of low or no-growth, China was coming off its impressive perennial high-growth trajectory, and quantitative easing in the United States was coming to an end? It was and is still unlikely interest rates were going to rise anytime soon.
Were our multilateral lenders surprised?
What we did buy, at some expensive monthly figure, was the bragging rights of a higher - by at least US$800 million - NIR and maybe some measure of stability for the Jamaican dollar.
So once again we are back to borrowing money to pay, expensively, for currency stability. Only sustained economic growth can make the price of currency stability really worthwhile and long-lasting.
Aubyn Hill is CEO of Corporate Strategies Ltd and chairman of the opposition leader's Economic Advisory Council.Email: firstname.lastname@example.orgTwitter: @hillaubynFacebook: facebook.com/corporate.strategies