Heavily indebted Jamaica was never going to be an easy credit to sell in the international bond markets. But confidence in the country's austerity drive and sensible pricing have allowed the borrower to return to the markets this year for the first time since June 1998.
JAMAICA'S return to the international bond markets this year was more than just a psychological boost for the borrower. With one of the heaviest public sector debt burdens of any rated sovereign, the international markets were a lifeline that Jamaica could ill afford to lose.
"Returning to the international markets was a tremendously positive development," says Jamaica's minister of finance, Omar Davies. "External bond financing is an important linchpin of our fiscal financing. It reduces the crowding out of the private sector in the domestic market and contributes to our aim of driving down interest rates."
Omar says that in retrospect, 1999 had been too early for Jamaica to approach the international investor base.
The sovereign failed to tap the dollar market via JP Morgan in July, and had another look at the markets in September before drawing back.
"It is a case of being wiser after the event," he says. "At that stage we still could not be specific about the costs of the restructuring of the financial sector, and there probably needed to be greater disclosure before we could come to the market."
Davies put the cost of the government bailout, which was triggered by mismanagement of funds that insurance companies were in theory holding as reserve funds for policy withdrawals, at around 25% of GDP net. "That is the cost coming back into the budget," he says.
Public sector debt rose from 102% of GDP at the end of the 1995/96 fiscal year to 144% at the end of the last fiscal year, as the banking crisis unfolded.
Market volatility at the time of Jamaica's failed attempt to tap the dollar market in July of 1999 added to the difficulties of selling the credit. To seal matters, a plant explosion in the US at Jamaica's largest importer of bauxite coincided with the deal, raising concern about the stability of foreign exchange inflows.
With last year's experiences still fresh in the mind, Davies was initially doubtful about whether returning to the international markets with a euro denominated bond issue in February would have any great chance of success.
When selling the deal, Deutsche Bank could point to the economic stabilisation programme which Jamaica was putting in place for 2000/2001-2001/2002, and to the fact that the cost of the financial sector restructuring was more precisely quantifiable than in 1999.
But selling the Jamaican credit into an entirely new market had its challenges.
"I was somewhat sceptical at first," says Davies. "But Deutsche Bank had done its homework and gave us a positive result that exceeded my expectations."
The acid test for Jamaica's rehabilitation with international investors, however, was the institutional offering to US investors in August.
Jamaica's signing of a letter of intent with the IMF, on July 19, was instrumental in generating support for the deal.
"The letter of intent represents a fleshing out of our economic and financial programme," said Davies, "and puts the discipline which the programme imposes on government under the spotlight, and that gave a lot of investors a level of comfort."
The successful sale of the $225m seven year issue by lead manager Bear Stearns and co-managers CSFB and Deutsche represented a vote of confidence from US institutional investors, but at a spread of 713bp, the deal was generously priced.
"If you do not have all the cards, you play the game with what you have," says Davies. "But it was an expensive deal for us and in future we would be looking for something lower."
Standard & Poor's (S&P's) decision to award an initial foreign currency rating of single-B flat to Jamaica, last November, did not help the borrower's cause, as the rating is two notches lower than the rating from Moody's.
S&P's analysis when announcing the ratings included the observation that "cash interest expenditures already consume about 51% of central government revenues and may exceed 60% in 2000". The report also said "Standard & Poor's estimates that the central government's forecast of a 4.6% deficit to GDP in the (1999/00) fiscal year will not be met due to higher debt servicing costs and weaker revenues".
Jamaica, in fact, beat the target of a 4.6% deficit to GDP by 0.2%-0.3%. Moreover, interest expenditures as a percentage of revenues remained below 60%, which has had little impact on S&P. It has stated that interest costs as a percentage of government revenues could still exceed 60% in the current fiscal year.
Some bankers think S&P's stance is overly bearish, but there is no doubting the negative message that the rating agency's analysis sends out, as interest costs running at 60% is usually the level that triggers debt restructuring.
"S&P's analysis is about as bearish as it is possible to get on the credit," says Christian Stracke, local Latin American markets' strategist at Deutsche Bank in New York.
"In my view, interest costs as a percentage of fiscal revenues are likely to stabilize at around 45%," he says, "and gradually come down to 40% as GDP growth picks up."
According to that argument, Jamaican paper offers investors the potential for a ratings upgrade.
"If interest costs as a percentage of fiscal revenues are substantially below 60% in the current fiscal year," says Stracke, "it would be hard to justify a single-B rating for the credit."
"The technicals should work in favour of investors," adds Carl Ross, head of Sovereign Research at Bear Stearns in New York, "and possibly one could see Jamaica's bonds outperform Argentinian paper over the medium term."
Tim Dowling, head of Latin American debt capital markets at Deutsche Bank in New York agrees. "Investors are looking not only for good relative value from Jamaican paper, but also for positive country specific events that will cause it to outperform," he said.
Jamaica's issues in euros and dollars are reasons in themselves for thinking that the country may confound S&P's veiled forecast of a debt restructuring for the second year running.
The euro issue had a tangible impact on domestic interest rates and analysts are predicting that the dollar issue will reduce rates further. Favourable for interest rates will be the disbursement of $150m each from the World Bank and the IDB over the next few months to pay down debt of the Financial Sector Adjustment Company - the government vehicle that was set up in response to the banking sector's collapse.
"The euro issue boosted confidence among local investors as it was a good demonstration of Jamaica's ability to reduce its domestic debt through the external bond markets," says Stracke at Deutsche Bank. "That helped push domestic rates down by 200bp, and it would not be unreasonable to expect a further 100bp fall as a result of the dollar transaction. I would be looking for another 100bp reduction over the course of the year as multilateral financing from the World Bank and IDB is disbursed."
The economic and financial programme, set in motion this year, is also inspiring a fair degree of confidence.
"Jamaica undoubtedly has high levels of debt but it also has an extremely credible record of fiscal control," says Stracke. "For much of the past decade it has been running a primary surplus that is well above the norm in other countries in the Latin American region."
Added Ross at Bear Stearns: "It has been an extreme fiscal tightening policy. The government has been raising tax revenues at a rate of 1.5% of GDP per annum, mainly through better compliance, and has kept a tight lid on public sector spending. That has come at a social cost, as the capital spending side of the budget has been cut right back, but it shows that the government is serious about reducing its debt right down. I cannot think of any other country in the world right now that is committed to running a 14% primary surplus as is the case with Jamaica."
But Jamaica has little choice, other than to maintain a large primary surplus, if it is to meet its target of reducing total public sector debt to 94% of GDP by 2004. *