OVER the past couple of years, the new JLP government has faced an almost constant stream of bad economic and financial news. This bad news flow had been accelerating over the past few months after S&P’s downgrade of Jamaica in early August, which has now been followed by the other major rating agencies. Up to now, this has also been in contrast with most of the rest of the world, which has had relatively good news flow since the American stock market bottom in March of this year.

The key problem is that Jamaica’s debt overhang, much of it a result of our own local financial crisis in the 1990’s, has left us with no room to respond to the impact of the international financial crisis. The contrast with the massive monetary and fiscal stimulus of most other countries has been sharp.

In his speech last Sunday, the Prime Minister correctly identified reducing the cost of debt, ie, interest rates, as Jamaica’s number one priority.

He noted that total interest payments of $128 billion accounts account for 16 per cent of our GDP, most of which service Jamaica’s domestic debt, which amounts to more than $700 billion alone. According to the Prime Minister “More than 84 per cent of that is at interest rates of more than 16 per cent. More than a half of it is borrowed at an average rate of more than 22 per cent.”

The Prime Minister noted that “Jamaica has had an unblemished record of repaying its debts”, and stated that “we have no intention of allowing that valuable reputation to be compromised and holders of government bonds are assured that our contractual obligations to them remain inviolable.”

This position is quite different from the one taken by Dubai, which on late Wednesday, November 25, announced that it will ask creditors for a “standstill” agreement to extend debt maturities by six months for its biggest corporate entity, Dubai World. Dubai World, the Dubai government’s flagship holding company, has businesses ranging from real estate to ports, and has been at the forefront of Dubai’s massive construction boom. Dubai World’s debt currently stands at an estimated US $59 billion, and represents the majority of what Union Bank of Switzerland analysts estimate as between US $80 to $90 billion in total debt owed by Dubai.

Bloomberg reports that international investor Mark Mobius believes that Dubai’s attempt to reschedule debt may spur a “correction” in emerging markets. Mobius, who oversees about $25 billion of developing nation assets as chairman of leading fund management company Templeton Asset Management Ltd, said a 20 per cent drop for shares is “quite possible.”

US investment bank Morgan Stanley’s MSCI Emerging Markets Index has already slumped by 4.3 per cent in the past two days after more than doubling from its 2009 low in March for a total gain of 65 per cent this year, or more than double the gain in developed markets.

The Dubai news may be a catalyst for a repricing of risk by international investors.

In Jamaica, risk has already been repriced. Some of our global bonds are yielding almost 13 per cent in US dollars, whilst quality local companies are trading for between four and six times earnings.

The apparent stabilisation of the global financial system has meant that return on capital has been back in vogue internationally, as almost all US money market accounts totalling over $4 trillion dollars – are yielding close to nothing.

However, the risk of international investing has now increased sharply with the almost across the board increase in prices, which when combined with events such as Dubai World, are likely to lead to a sharp correction in the prices of international investments in the not too distant future. The alternative of holding money at zero percent in money market funds or bank deposits in the US or UK also has a high opportunity cost for locally based investors.

Assuming the satisfactory rescheduling of the Michael Lee Chin owned AIC (Barbados) loan notes next week, and the completion of Jamaica’s IMF deal a week or two after, local investors should begin to look more favourably at local investment opportunities. Significantly lower domestic interest rates in the first quarter of next year would sharply reduce Jamaica’s country risk, a win – win scenario for both local investors and the government.