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By Keith Collister
Friday, November 06, 2009
It is unfortunate that some of our more vocal analysts seem to regard our most recent downgrade as a government management issue. The rating downgrade is clearly an echo of the events of early August, when Jamaica was apparently downgraded for thinking about (the thought, not the action) undertaking a liability management programme, or put more simply, doing a debt swap. This "thought" was actually based on a proposal put forward in March as the combined effort of a number of key securities dealers to give the Government some cash flow relief.
The securities dealers' proposal was actually very similar to the one prepared in early 2004. At that time, however, unlike now, an offering memorandum was prepared, and the vast majority of the local private sector institutions subscribed (made an offer) which the Government correctly decided to decline as confidence returned. Indeed, the very knowledge that the domestic financial institutions were prepared to make such an offer was seen as positive, and helped to restore confidence at home and abroad.
The key problem with a strict liability management programme proposal is that it only provides cash flow relief, giving one lower interest rates at the front end, offset by higher rates at the back end. This is essentially what the rating agency requirement that any such swap be net present value neutral, to avoid being termed a default, actually means.
About the same time as the proposal was first made, Jamaica was downgraded from B+ to B-. This meant that S&P automatically classified any proposed swap as a restructuring, as under their criteria a swap by a country rated below B was neither voluntary nor opportunistic. To the outside observer, all this confusion could have been avoided by a simple call by S&P to the Ministry of Finance. It is unlikely that Jamaica would have gone ahead with a programme that they had not yet even designed if S&P had told them this would lead to an automatic downgrade of our rating.
The most recent downgrade, sparked by the governor's departure, also shows the disconnect between local investors, who do not appear overly concerned, and foreign investors, who could be pardoned for being disconcerted by the governor's departure whilst an IMF team is in Jamaica. Nevertheless, foreign investors should note that local investors virtually always have much better information, being closer to sources on the ground.
Why refinancing is the best option
It is not the intention of the Government to restructure the debt, and foreign observers have underestimated Jamaica's chances of getting cheaper funding. Our chances are better than average, partly because long before he became minister of finance, Minister Shaw has consistently been seeking cheaper money from the multilaterals to refinance Jamaica's high-cost debt.
Jamaica does not in fact need debt relief (such as received by the very poor countries) but access to very low interest rate money to allow it to refinance its debt. Indeed, despite all the lofty words of the G20 meeting in London, it is seriously ironic that the Fed and the Bank of England have put the hedge funds of the US and UK back in business with basically unlimited amounts of cheap money (hedge funds can borrow at a small spread over their Central Bank policy rates) when to date the multilaterals have lent Jamaica insufficient funds to make a difference (although the IDB must be commended for trying).
If Jamaica can get between $3 billion and $4 billion in loans (this would need to be front-loaded) at a rate of between one and two per cent over the three-year life of an IMF programme, combined with other key measures, Jamaica could break itself out of its current debt trap.
Once the Government receives the necessary multilateral funding, it should simply take advantage of a perfectly legal clause in domestic debt prospectuses, as outlined in my article "Jamaica should refinance, not restructure, its debt" in last weeks Wednesday's Business Observer.
It should be noted that the fact that refinancing is a preferred option over the liability management programme proposal is not in any way a critique of the patriotic Jamaicans who prepared the March proposal, as when that was first prepared, Jamaica had not yet requested the IMF programme required to unlock enough money to make refinancing possible.
Central Bank Governance
Some analysts have unfortunately described the portion of Prime Minister Golding's Tuesday speech in Parliament on central bank governance as a "red herring". It is therefore fortunate that at a First Global-sponsored talk yesterday, entitled "Cocktails and Conversation", GraceKennedy's newly appointed chief operating officer and former Minister of Finance without portfolio, Don Wehby, addressed the wider issues of central bank governance, noting that the governor's departure had created an opportunity to review the structure of our Central Bank.
Wehby began by noting that in his view, the role of the chairman and the governor of the bank should be separated in line with good Corporate Governance principles. Whilst admitting that he had not seen an example of this structure elsewhere, Wehby argued that this could be a good move in our particular circumstances.
Critically, Wehby revived the idea of a monetary policy committee, which was last seriously raised by the local financial sector during the 2003 crisis as part of the then partnership for progress initiative, also driven by Jamaica's high level of indebtedness.
"A Monetary Policy Committee should be established (a similar committee was set up by Gordon Brown in 1997). The control mechanisms should include decisions on interest rates, decision on reserve requirements and currency market transactions. Decisions by the Monetary Policy Committee must be based on the bank's objectives and a thorough assessment of the current situation, the outlook for the economy, monetary issues and financial stability.
http://www.jamaicaobserver.com/magaz...AP_MONEY__.asp
Friday, November 06, 2009
It is unfortunate that some of our more vocal analysts seem to regard our most recent downgrade as a government management issue. The rating downgrade is clearly an echo of the events of early August, when Jamaica was apparently downgraded for thinking about (the thought, not the action) undertaking a liability management programme, or put more simply, doing a debt swap. This "thought" was actually based on a proposal put forward in March as the combined effort of a number of key securities dealers to give the Government some cash flow relief.
The securities dealers' proposal was actually very similar to the one prepared in early 2004. At that time, however, unlike now, an offering memorandum was prepared, and the vast majority of the local private sector institutions subscribed (made an offer) which the Government correctly decided to decline as confidence returned. Indeed, the very knowledge that the domestic financial institutions were prepared to make such an offer was seen as positive, and helped to restore confidence at home and abroad.
The key problem with a strict liability management programme proposal is that it only provides cash flow relief, giving one lower interest rates at the front end, offset by higher rates at the back end. This is essentially what the rating agency requirement that any such swap be net present value neutral, to avoid being termed a default, actually means.
About the same time as the proposal was first made, Jamaica was downgraded from B+ to B-. This meant that S&P automatically classified any proposed swap as a restructuring, as under their criteria a swap by a country rated below B was neither voluntary nor opportunistic. To the outside observer, all this confusion could have been avoided by a simple call by S&P to the Ministry of Finance. It is unlikely that Jamaica would have gone ahead with a programme that they had not yet even designed if S&P had told them this would lead to an automatic downgrade of our rating.
The most recent downgrade, sparked by the governor's departure, also shows the disconnect between local investors, who do not appear overly concerned, and foreign investors, who could be pardoned for being disconcerted by the governor's departure whilst an IMF team is in Jamaica. Nevertheless, foreign investors should note that local investors virtually always have much better information, being closer to sources on the ground.
Why refinancing is the best option
It is not the intention of the Government to restructure the debt, and foreign observers have underestimated Jamaica's chances of getting cheaper funding. Our chances are better than average, partly because long before he became minister of finance, Minister Shaw has consistently been seeking cheaper money from the multilaterals to refinance Jamaica's high-cost debt.
Jamaica does not in fact need debt relief (such as received by the very poor countries) but access to very low interest rate money to allow it to refinance its debt. Indeed, despite all the lofty words of the G20 meeting in London, it is seriously ironic that the Fed and the Bank of England have put the hedge funds of the US and UK back in business with basically unlimited amounts of cheap money (hedge funds can borrow at a small spread over their Central Bank policy rates) when to date the multilaterals have lent Jamaica insufficient funds to make a difference (although the IDB must be commended for trying).
If Jamaica can get between $3 billion and $4 billion in loans (this would need to be front-loaded) at a rate of between one and two per cent over the three-year life of an IMF programme, combined with other key measures, Jamaica could break itself out of its current debt trap.
Once the Government receives the necessary multilateral funding, it should simply take advantage of a perfectly legal clause in domestic debt prospectuses, as outlined in my article "Jamaica should refinance, not restructure, its debt" in last weeks Wednesday's Business Observer.
It should be noted that the fact that refinancing is a preferred option over the liability management programme proposal is not in any way a critique of the patriotic Jamaicans who prepared the March proposal, as when that was first prepared, Jamaica had not yet requested the IMF programme required to unlock enough money to make refinancing possible.
Central Bank Governance
Some analysts have unfortunately described the portion of Prime Minister Golding's Tuesday speech in Parliament on central bank governance as a "red herring". It is therefore fortunate that at a First Global-sponsored talk yesterday, entitled "Cocktails and Conversation", GraceKennedy's newly appointed chief operating officer and former Minister of Finance without portfolio, Don Wehby, addressed the wider issues of central bank governance, noting that the governor's departure had created an opportunity to review the structure of our Central Bank.
Wehby began by noting that in his view, the role of the chairman and the governor of the bank should be separated in line with good Corporate Governance principles. Whilst admitting that he had not seen an example of this structure elsewhere, Wehby argued that this could be a good move in our particular circumstances.
Critically, Wehby revived the idea of a monetary policy committee, which was last seriously raised by the local financial sector during the 2003 crisis as part of the then partnership for progress initiative, also driven by Jamaica's high level of indebtedness.
"A Monetary Policy Committee should be established (a similar committee was set up by Gordon Brown in 1997). The control mechanisms should include decisions on interest rates, decision on reserve requirements and currency market transactions. Decisions by the Monetary Policy Committee must be based on the bank's objectives and a thorough assessment of the current situation, the outlook for the economy, monetary issues and financial stability.
http://www.jamaicaobserver.com/magaz...AP_MONEY__.asp