THE recently announced Jamaica debt exchange offer which sees 350 instruments reduced to just 24 offering an interest rate of 12.25 per cent may — albeit inadvertently — help to spur the Jamaican economy into greater productivity, innovation and entrepreneurship.

As it currently stands, the government spends some J$182 billion a year on interest payments, thus severely restricting its ability to finance capital projects and provide essential civic services. The global recession combined with government missteps and miscalculations have led the country to a precipitous position, and the government must now secure US$1.3 billion from the International Monetary Fund (IMF) in the form of a Standby Arrangement which will go to ensure both balance of payments and local currency stability.

The Jamaican government has now concluded its Letter of Intent to the IMF and is expecting that it will be approved by its board of directors on January 27. The debt exchange programme forms the linchpin of its pitch to the IMF and is an initiative designed to address the country’s woeful indebtedness which comes to a whopping J$1.2 trillion.

Vital and important move

The magnitude of the importance of this debt exchange programme was made clear by the Prime Minister in a meeting held at Jamaica House earlier this week where he said: “If we do not complete the exchange offer, we will not have an IMF programme, which means no unshakeable commitment to fiscal discipline, no standby facility and no new resources (over US$1 billion of new resources from the other multilaterals). This would severely erode market confidence in Jamaica.

“The Exchange Offer is an integral part of the Government of Jamaica’s medium-term economic programme developed in partnership with the IMF. The programme will decrease the public debt ratio, improve fiscal discipline and accountability, achieve higher levels of sustained economic growth and extend the social safety net.”

For more than twenty years interest payments on government paper have been the Achilles Heel of successive governments, spelling a recurring cycle of debt thereby earning Jamaica the unflattering sobriquet, ‘The sick man of the Caribbean’. Over the last decade, Jamaica’s domestic debt has increased by an incredible 500 per cent while its external debt has gone up by 100 per cent. Mired in debt, the government has administered yet more debt as an antidote to a virulent attack on the country’s primary organs. Now it finds itself having to go cold turkey in order to save itself and this may very well be the path to its redemption.

Financial sector got fat on paper profits

For far too long the financial sector and the affluent have gorged themselves on high interest rates (on government paper), becoming corpulent and lethargic. This method of investment has served to decimate the productive sector and induced a torpor which has left the so-called ‘business sector’ to do anything but engage in business activity. A cursory look at the balance sheets and financial statements of many listed companies invariably reveals a heavy weighting in government paper, making a mockery of any declaration of profits and creditable performances.

Earlier this week the Business Observer pointed out that Mayberry Investments Limited earned 85 per cent of its J$2.1 billion gross operating revenue from interest income over nine months to September 30, 2009. Its investment securities at the end of that period came to $14.7 billion while total assets stood at $23.8 billion. Loans and other receivables amounted to only $1.9 billion. NCB earned $22.3 billion or 51 per cent of its $43.8 billion gross income from interest on securities for its year to September 30, 2009.

The country’s leading banking entity, Scotia Group Jamaica earned $18.1 billion or 37 per cent of its $47.9 billion gross operating income from interest from securities during its financial year that ended October 31, 2009.

Both leading commercial banks, NCB and Scotia, reported end-of-year net profits of J$10.5 and J$11 billion respectively. Sounds very impressive, but it was hardly due to core business and therein lies the problem. The Financial performance of many Jamaican companies, particularly those in the financial sector is a virtual reality, it never paints the true picture. The national debt is a Great While Shark and the financial sector companies are its pilot fish.

Kudos to the Golding administration — at last!

The Golding administration, with its back against the wall, has finally become proactive and its latest initiative is commendable. It earns kudos for not making it a mandatory stipulation and insisting that it will not accept the IMF and other multilateral support unless it receives 100 per cent participation. This signals that it wants the entire financial sector to buy into the transaction.

This could prove to be tricky. Already there are those who are bemoaning that such a move will impair their balance sheets and force them to the wall. Other cite acute problems with liabilities management. And there are those who fear that finance houses will simply look to address the shortfall in revenue by passing it on to customers through an assortment of fees and nebulous charges.

Building real businesses

Let’s be patently clear — the muscles of many of Jamaica’s leading companies have atrophied.They find it far easier to look to earning interest on government paper than to engage in the cut and thrust of business. This crutch has now been removed and they will have to actively find ways to be more competitive and offer better products and services. Jamaica has always punched above its weight class, and business is no exception. Carl Hendrickson, Gordon ‘Butch’ Stewart, Thalia Lyn, Doug Halsall and Vincent Chang all built companies exhibiting the best of entrepreneurship and business acumen. Their ventures were not built on paper but on something more substantial — sweat and enterprise.

Although the government may have been forced to go this route by the IMF, it may well help to change the mindset of many businesses. Faced with successive hurricanes, diminishing markets, the end of preferential treatments, Jeffrey Hall and Charles Johnston have successfully changed Jamaica Producers business model, deciding not to export bananas and grow other business arms and so turned the company around.

The financial sector must follow suit. The debt exchange problem will see the government saving J$40 billion which can go into more pressing matters like schools, hospitals, roads and other infrastructural endeavours.

Though some financial institutions may balk at this latest move and bemoan the impact on their balance sheets, the betterment of the country must be foremost in their minds. The government cannot continue paying out close to J$200 billion in interest payments while the country draws nearer to the abyss. Besides, a return of 12.25 per cent is still very generous and one would find that hard to come by anywhere else in the world.

JMMB comes out in support

Jamaica Money Market Brokers (JMMB) was the first financial institution to unequivocally declare its support of the government’s debt management programme.

A statement read: “In principle, we support the initiative and stand ready to continue discussions with the Government and work through the details to gain the best possible results for all stakeholders and the future of the country. This will have an impact on direct holders of the debt including ourselves and facilitates a more equitable sharing of the burden.

“Though the full details of the Debt Exchange initiative are not completed, the JMMB team has modelled several scenarios and prepared various strategies to address the potential impact and we stand ready to execute as necessary. In addition, the Government in designing this initiative also took into consideration the impact on each individual financial institution and is sufficiently prepared to support accordingly.”

It can only be hoped that other finance houses take JMMB’s lead and expeditiously declare their support for the government initiative so that it can get the required consensus it is requesting. To date there has been very little disgruntlement and that bodes well.

Both the Jamaica Securities Dealers Association (JSDA) and the Jamaica Bankers Association (JBA) through a joint press release also commended the government

The release read: “The JSDA and the JBA commend the Government’s intention to take the hard decisions necessary towards a realistic and sustainable medium-term economic programme that will ultimately lead to increased economic growth and improved well-being for all Jamaicans. We recognise that a well designed Liability Management Programme needs to be part of a medium-term economic plan, together with effective tax reform, fiscal consolidation and increased transparency in fiscal management.

“We are committed as an industry to play our part, and look forward to seeing the final details of the Debt Exchange programme so that we can respond within the timeframes necessary to help the Government secure the necessary IMF standby Agreement.”

The Jamaica Chamber of Commerce (JCC) also threw its support behind the government declaring, “The JCC wishes to give a nod of approval to the debt exchange strategy which has been unveiled by the Government of Jamaica. In our view, the planned debt exchange represents the single most important blow which has been struck against high interest rates for several decades.”

Forget the rating agencies

There are those who argue that this recently announced debt exchange move comes a year late and that it may well lead to further downgrades by the rating agencies. At this juncture, that is a moot point. What is encouraging is that the government has acknowledged the enormity of the problem and is prepared to address it by targeting the single most detrimental obstacle to economic growth — high interest rates which are a cancer in the body of the Jamaican economy. We do pray that it was caught and removed in time.

As for the rating agencies, that cannot be of primary concern. Incurring their wrath is a risk the government will have to run for the greater good of the country. It is the government that is responsible for both the management and well-being of the economy — not the rating agencies. It is time to roll up our selves and get to work.