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With Shari DaCosta
Wednesday, March 25, 2009
From its high-debt burden, to currency depreciation and high interest rates, Jamaica has endured its fair share of challenges in years gone by. At the same time, the economy has demonstrated a level of resilience that is truly undeniable.
We have been downgraded by ratings agencies before and bounced back, and the latest round of downgrades occurring this month will prove no different. The truth is that these measures are not completely accurate at determining Jamaica's economic reality as we have a growing informal sector which is not accounted for in the estimates. In the same breath, this inability to measure the informal sector has made corporate taxes a point of failure in terms of government revenues.
Last week, Standard & Poor's Rating Service downgraded Jamaica's sovereign debt and threatened to push it down even further. The ratings agency lowered the country's long-term sovereign credit rating to 'B-'from 'B', simultaneously reduced the short-term rating one level to 'C' from 'B', and said the outlook was negative. The move followed the decision by Moody's Investors Service earlier this month to issue a downgrade as well.
After having Jamaica on notice since November 2008, Moody's lowered Jamaica's foreign and local currency bond ratings to B2 (down from B1 and Ba2). And while the purpose of these ratings is to assess the level of risk associated with Government of Jamaica (GOJ) debt, one has to wonder whether the downgrade is a true reflection of reality. That is, is the country really more likely to default on its debt?
A large part of the concern expressed by ratings agencies is that despite the government's commendable attempts at achieving fiscal sustainability, the broader, global climate is just too harsh and as a small wide-open economy we are simply too vulnerable. One could hardly disagree that the global economic crisis is not a severe one, or that we don't bear a great deal of exposure. However, as far as implications on the likelihood that we will repay our debt is concerned, there is definitely room to be optimistic. This is not to downplay the gravity of the situation, but Jamaica has seen worse, and more importantly, overcome worse.
To demonstrate this, we could look back six years, when the economy was in poorer shape. On the global front, emerging markets were experiencing financial crises, with many unable to get a grip on their local currencies. To make matters worse, in March of 2003 the United States declared the war on Iraq which also negatively impacted the international capital markets. Moody's downgraded Jamaica then too, making it more difficult to finance the widening fiscal deficit through international markets. As a result, most of the funds were acquired through the local credit market, though the Government was able to secure more funds than initially planned on international market.
Jamaica's Net International Reserves (NIR) sank 27 per cent to US$1.16b in December 2003, from US$1.6b in December 2002. Interest rates skyrocketed during the year, with the average rate for the benchmark 180-day Treasury bill yielding as high as 33.47 per cent and BOJ reverse repurchase rates on 180-day instruments up to 33.15 per cent. The Jamaican dollar fell 31.42 per cent against the US dollar, devaluing from $50.30 in January 2003 to $67.22 by mid-May.
Compare this with today, when our NIR stands at a much more stable level of US$1.60 billion. In terms of interest rates, the 180-day Treasury bill stands at 24 per cent and BOJ repurchase rates on 180-day instruments stand at 21.5 per cent. The Jamaican dollar has devalued only 23 per cent since the beginning of September, 2008. In the previous case, when the numbers appeared far less attractive, we were able to bounce back.
We should also take into account that the agencies issuing these downgrades upheld top-notch ratings for US institutions which either failed or came close to it when the financial crisis worsened last fall. Additionally, in the past, some suggested that Jamaica would inevitably default on its debt, but Jamaica has never missed a domestic or external debt payment. In fact, it is required by our Constitution that debt servicing is the first payment on the country's resources. In other words, the Government is legally bound to list financing the debt as priority number one.
It is also important to remember that as much as Jamaica has been hurt by the current downturn, it will benefit from the global rebound and finance our debt more easily when the credit markets loosen up. Until then, the Government has managed to get creative, tapping the Inter-American Development Bank, China, the World Bank and even Scotia Group to finance its debt obligations.
In addition, while interest rates are higher than we'd like them to be ideally, the Bank of Jamaica's efforts seem to have taken root and the dollar now appears to be stable. This reduces the risk associated with our foreign currency-based debt in particular (though higher rates won't help our locally-based debt with floating interest rates).
Furthermore, after visiting Jamaica in December, the International Monetary Fund Managing Director Dominique Strauss-Kahn expressed confidence in the Government's timetable "for achieving a balanced fiscal budget over the medium-term."
Jamaica will repay its debt, and while it's important to acknowledge the difficulties we are currently facing, it is also important not to get our vision clouded by the gloomy picture presented to us every day, whether via ratings agencies (especially since they failed to predict the fate of many, now troubled US institutions) or others. If the past is to be a lesson to us, we should learn that Jamaica has not failed to pay its debt before and will not likely start now.
Shari DaCosta is a Research Analyst at Stocks & Securities Ltd (SSL). You can contact her at sdacosta@sslinvest.com
http://www.jamaicaobserver.com/magaz...ALLY_MEAN_.asp
Wednesday, March 25, 2009
From its high-debt burden, to currency depreciation and high interest rates, Jamaica has endured its fair share of challenges in years gone by. At the same time, the economy has demonstrated a level of resilience that is truly undeniable.
We have been downgraded by ratings agencies before and bounced back, and the latest round of downgrades occurring this month will prove no different. The truth is that these measures are not completely accurate at determining Jamaica's economic reality as we have a growing informal sector which is not accounted for in the estimates. In the same breath, this inability to measure the informal sector has made corporate taxes a point of failure in terms of government revenues.
Last week, Standard & Poor's Rating Service downgraded Jamaica's sovereign debt and threatened to push it down even further. The ratings agency lowered the country's long-term sovereign credit rating to 'B-'from 'B', simultaneously reduced the short-term rating one level to 'C' from 'B', and said the outlook was negative. The move followed the decision by Moody's Investors Service earlier this month to issue a downgrade as well.
After having Jamaica on notice since November 2008, Moody's lowered Jamaica's foreign and local currency bond ratings to B2 (down from B1 and Ba2). And while the purpose of these ratings is to assess the level of risk associated with Government of Jamaica (GOJ) debt, one has to wonder whether the downgrade is a true reflection of reality. That is, is the country really more likely to default on its debt?
A large part of the concern expressed by ratings agencies is that despite the government's commendable attempts at achieving fiscal sustainability, the broader, global climate is just too harsh and as a small wide-open economy we are simply too vulnerable. One could hardly disagree that the global economic crisis is not a severe one, or that we don't bear a great deal of exposure. However, as far as implications on the likelihood that we will repay our debt is concerned, there is definitely room to be optimistic. This is not to downplay the gravity of the situation, but Jamaica has seen worse, and more importantly, overcome worse.
To demonstrate this, we could look back six years, when the economy was in poorer shape. On the global front, emerging markets were experiencing financial crises, with many unable to get a grip on their local currencies. To make matters worse, in March of 2003 the United States declared the war on Iraq which also negatively impacted the international capital markets. Moody's downgraded Jamaica then too, making it more difficult to finance the widening fiscal deficit through international markets. As a result, most of the funds were acquired through the local credit market, though the Government was able to secure more funds than initially planned on international market.
Jamaica's Net International Reserves (NIR) sank 27 per cent to US$1.16b in December 2003, from US$1.6b in December 2002. Interest rates skyrocketed during the year, with the average rate for the benchmark 180-day Treasury bill yielding as high as 33.47 per cent and BOJ reverse repurchase rates on 180-day instruments up to 33.15 per cent. The Jamaican dollar fell 31.42 per cent against the US dollar, devaluing from $50.30 in January 2003 to $67.22 by mid-May.
Compare this with today, when our NIR stands at a much more stable level of US$1.60 billion. In terms of interest rates, the 180-day Treasury bill stands at 24 per cent and BOJ repurchase rates on 180-day instruments stand at 21.5 per cent. The Jamaican dollar has devalued only 23 per cent since the beginning of September, 2008. In the previous case, when the numbers appeared far less attractive, we were able to bounce back.
We should also take into account that the agencies issuing these downgrades upheld top-notch ratings for US institutions which either failed or came close to it when the financial crisis worsened last fall. Additionally, in the past, some suggested that Jamaica would inevitably default on its debt, but Jamaica has never missed a domestic or external debt payment. In fact, it is required by our Constitution that debt servicing is the first payment on the country's resources. In other words, the Government is legally bound to list financing the debt as priority number one.
It is also important to remember that as much as Jamaica has been hurt by the current downturn, it will benefit from the global rebound and finance our debt more easily when the credit markets loosen up. Until then, the Government has managed to get creative, tapping the Inter-American Development Bank, China, the World Bank and even Scotia Group to finance its debt obligations.
In addition, while interest rates are higher than we'd like them to be ideally, the Bank of Jamaica's efforts seem to have taken root and the dollar now appears to be stable. This reduces the risk associated with our foreign currency-based debt in particular (though higher rates won't help our locally-based debt with floating interest rates).
Furthermore, after visiting Jamaica in December, the International Monetary Fund Managing Director Dominique Strauss-Kahn expressed confidence in the Government's timetable "for achieving a balanced fiscal budget over the medium-term."
Jamaica will repay its debt, and while it's important to acknowledge the difficulties we are currently facing, it is also important not to get our vision clouded by the gloomy picture presented to us every day, whether via ratings agencies (especially since they failed to predict the fate of many, now troubled US institutions) or others. If the past is to be a lesson to us, we should learn that Jamaica has not failed to pay its debt before and will not likely start now.
Shari DaCosta is a Research Analyst at Stocks & Securities Ltd (SSL). You can contact her at sdacosta@sslinvest.com
http://www.jamaicaobserver.com/magaz...ALLY_MEAN_.asp