Jamaica aims to restore market confidence

Jamaica’s government is fighting to restore credibility with markets as it restructures domestic debt for a second time in three years to stave off an economic crisis.

After Jamaica’s biggest bondholders agreed to the debt restructuring plan, 97 per cent of creditors ended up accepting the offer by the deadline on Thursday, clearing the way for the International Monetary Fund to disburse a $750m financial lifeline to the government.

Peter Philips, Jamaica’s finance minister, rejected concerns that the government would not stick to the new programme, whichalso includes tax increases and wage freezes.

The previous government, which lost a 2012 election seeking a mandate to implement harsh measures required as part of an agreement with the IMF, failed to implement tax, wage, and competitiveness reforms.

Mr Philips said the new programme consists of “front-loaded sweeping actions by the government, combined with an outside stakeholder monitoring process and an internal implementation process.

“Of course, the more fundamental reason why this time is different is that politically and financially we simply can’t contemplate failure,” Mr Philips said.

Jamaica is one of the most heavily indebted countries in the world with national debt at 140 per cent of gross domestic product, despite its J$700bn ($7.5bn) restructuring in 2010.

Politicians have been under pressure to improve the country’s finances, with 55 per cent of budget spending destined for debt repayments, severely limiting ministers’ ability to invest in growth and development after its all-important tourism and bauxite industries were hit by the global financial crisis.

The restructuring – which follows similar moves by other Caribbean nations , including St Kitts and Nevis, Grenada and Belize – will see bondholders exchange J$860bn in existing debt for lower yield bonds and later maturity dates, although there will be no haircut on their principal investment.

Jamaica’s government hopes that the decline in interest payments will allow it to cut its debt ratio to about 95 per cent of GDP over the next seven years, or approximately $17bn a year between now and 2020.

Standard & Poor’s, the rating agency, downgraded Jamaica to selective default after the debt exchange was announced this month, arguing that “investors will receive less value than promised as per the original securities based on the lower interest rate and maturity extension”.

The agency added that the offer is “distressed rather than opportunistic since the issuer does not intend to fulfil its original obligations”.

While the new restructuring could ease short-term liquidity concerns, doubts remain as to whether the exchange will resolve Jamaica’s long-running debt problems, especially as the restructuring only affects domestic debt.

“The last debt exchange failed because it left Jamaica with a disastrously unsustainable debt burden and because, as in Greece, they shrank the economy, thus worsening the debt burden,” said Mark Weisbrot, an economist at the Centre for Economic and Policy Research think-tank.

“This proposed debt deal and IMF agreement are the same in both deadly aspects,” he added, pointing out that for the fiscal year of 2012-13 the interest burden was still 11 per cent of GDP, or 3.7 times that of Greece.

But Keith Collister, chairman of the Jamaican Chamber of Commerce’s economic affairs and taxation committee, saw room for more optimism this time.

“The previous government had a very slim majority, and lost an election that it called at the end of 2011 to get a mandate to implement the ‘bitter medicine’ required to get the IMF programme back on track. The new government has a two-thirds majority and greater political capital, all of which it will now have to use to implement a very similar, although tougher, reform programme,” Mr Collister said.

Jay Collins, vice-chairman of corporate and investment banking at Citigroup – the bank, which is advising the government – argued that the new programme has a better chance of success because all parties involved had common interests and it included “upfront measures, prior conditions and greater implementation teeth.”