A real coup for Jamaica

Friday, July 04, 2014

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CALLING Jamaica's success in raising US$800 million on the international bond market a real coup may raise some eyebrows. It may even recall the days when Jamaica's success seemed to be measured by what we could borrow, rather than what we could earn.

It will certainly remind the jaundiced observer of the Jamaican economy why we are under International Monetary Fund (IMF) management. The answer being, of course, excessive debt.

There are reasons, however, to take a much more positive view of Tuesday's Eurobond deal. First, it appears to be blessed by the IMF, with the money being raised immediately after the personal visit by IMF head Christine Lagarde. Indeed, her very positive remarks were specifically mentioned by the key broker as a reason for the bond's success.

The dirty little secret about Jamaica's second IMF programme is that it has been under-funded, certainly relative to the country's needs and also in comparison with the first programme. One of the major multilaterals involved, the IDB, already had a high exposure to Jamaica relative to its size, and more importantly our own.

The IMF itself had already lent us a large amount of money relative to our quota in 2010, which we are in the process of paying back — over US$160 million this year alone.

The other main player, the World Bank, had until recently taken a more cautious approach in lending to Jamaica. The IMF chief, on her trip here, made a polite reference to the severe scepticism about Jamaica's track record in Washington when we negotiated our second programme.

In the programme, the IMF made what seemed to many to be an unrealistic assumption, namely that the PetroCaribe agreement would last as is for its full life. This assumption, of course, was convenient in that it reduced the need for their official financing. Indeed, on a net basis PetroCaribe funding is projected to slightly exceed the combined multilateral funding over the life of the programme, and particularly for this year.

All of this was known, in part, in the boardrooms of Jamaica, most certainly by the economists at our major international banks, and even by the man in the street, who while he might not understand all the details, knew in a visceral sense that US dollars were short.

Unsurprisingly, our high country risk created a general lack of confidence, evidenced by a falling local stock market and a frozen local fixed-income market, all accentuated by the impact of a continuing devaluation. In short, over the past year the Jamaican economy was under stress, at least partially, due to legitimate concerns over whether we were fully financed, as the local fixed-income market had not yet reopened and the international bond market still appeared closed.

With the coup of the re-opening of the global bond market to Jamaica, and four IMF tests passed "like clockwork", in the words of Madame Lagarde, the risk of default is now effectively off the table for this fiscal year. Instead, a virtuous circle beckons, meaning the stabilisation of the dollar, and the reversal of the rise in domestic interest rates, particularly as we no longer need to borrow in the local market this year.

Jamaica also no longer needs emergency funding from the multilaterals if PetroCaribe falls apart tomorrow. The focus of policy can now move from merely reducing macroeconomic uncertainty, to creating genuine confidence through growth-inducing reforms. Let the turnaround begin.




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