The international bond market is saying that the Jamaican economy is finally turning around.

For nearly two decades, Jamaica’s “Eurobond” king, Oppenheimer’s Gregory Fisher, has traded in Jamaica’s overseas debt, particularly its internationally issued Eurobonds, in which he is the largest single player/custodian. His market share reflects his deep links in the Jamaican financial community, and their ownership of most of Jamaica’s US dollar Eurobond debt.

For most of this period, he was at the fabled Bear Stearns, where he essentially built its regional business, but moved to Oppenheimer well before Bear’s catastrophic failure during the global financial crisis.

His story is worth telling, however, because of his vast experience with those extremely hard-nosed investors in the international capital market interested in investing in Jamaican Eurobonds, of which there are normally only an extremely limited number.

The background to his, and Jamaica’s economic story, of which Fisher has had a front row seat, is that Jamaica has been in a severe economic and financial crisis for the past seven years (the biblical seven lean years), culminating in a return to the IMF in 2010, and two debt exchanges — or three if you include the additional ‘private’ debt exchange agreed by the largest local players in the financial sector when the second debt exchange of 2013 fell short of the savings required by the IMF.

Our historic economic vulnerability

Our crisis was triggered by the global financial crisis that began in August 2007, which just happened to coincide with a change in the government of Jamaica. The new government then faced the additional impact from a food and energy shock in 2008. Our exceptional economic vulnerability going into the crisis in 2007, as identified officially by the US government at the time (amongst many others), meant that Jamaica’s economic recovery, unlike some other emerging market players with much greater financial buffers, lower debt, and productive capacity, for example, China, was always going to be extremely difficult, and take more time than policymakers recognised, at least officially.

Recognition of this fact was no doubt what prompted then Prime Minister Andrew Holness’s very accurate election remark forecasting “bitter medicine”.

The medicine over the seven-year period has indeed been remarkably painful, for virtually all sectors of the society, boiling down to a reduction of Jamaica’s overall standard of living to bring it more into line with what it actually produces, as our “credit card” was effectively cancelled. So far, however, Jamaica has shown remarkable social cohesion in the face of such austerity, a point to which we will return.

The key point, according to Fisher, is that over the past 12 months to the end of April, out of the top 40 internationally traded Eurobonds in JP Morgan’s emerging market bond index (EMBI), Jamaica had four bonds. Fisher advises, “I have never seen that in all my years working in the region since 1993.” He adds, “In the last few months, the non-Jamaican global buying is at a level I have not seen in years, particularly the size of the trades.”

Furthermore, an analysis of Jamaica’s issued Eurobond debt of just under US$4 billion reveals another first, namely that the principal outstanding of a couple of our shorter-term issues has also fallen. This appears to suggest that Jamaica has finally begun the “liability management” promised in successive budgets over the years, but apparently never delivered.

In clearer terms — for the majority of us who are not international investors — this means that the Jamaican government must be quietly buying back some of its Eurobond debt from the international market. Minister of Finance Peter Phillips in fact confirmed that the government had been buying back debt during a press breifing at the Ministry yesterday.

A virtuous circle

Of course, the fact that the Jamaican authorities feel sufficiently confident to retire this higher cost debt will further increase international investors’ appetite for our international paper, as they come to realise a virtuous circle is forming. Whilst it is unlikely that our Eurobond prices will go up that much from here (our bond yields are already low by historical and more importantly in comparison to our similarly rated peers), nevertheless, this means we have finally completely regained access to international market financing.

This new-found appetite for Jamaican paper, in an environment of continued easy credit conditions, should allow, according to other international investors, a successful issue of a new international Eurobond to finance the buy back of the PetroCaribe debt of roughly US$3 billion at around half price, or let us say US$1.5 billion.

By reducing our debt to GDP ratio by roughly 10 percentage points in one fell swoop, this would allow the IMF, at some point, probably in the next financial year, to relax our very onerous primary surplus target of 7.5 per cent, particularly if they start to project faster economic growth for Jamaica.

The government could then begin, or perhaps accelerate, a programme of refinancing to reduce our interest costs, staying completely out of the local bond market on a net basis, and continuing to reduce our overall debt to GDP ratio.

Although our “market” Eurobond debt would increase, to say roughly US$5.5 billion, as long as the government continues to meet its IMF targets, Wall Street’s appetite for Jamaican debt should actually increase, not decrease, as our available Eurobond issues would now be of sufficient size to make it worth paying attention. In short, they could get some bonds to trade or even invest in, as longer-term institutional investors become more comfortable with Jamaican risk.

The government should also take the opportunity to divest itself of the Eurobonds held by the PetroCaribe fund, while they are at it, perhaps as part of a plan to turn the fund into a true sovereign wealth fund, with the ability, for the time being, for the fund to also invest locally in “profitable” projects. While they are at it, having eliminated the debt through buying back the PetroCaribe deal, they should unsentimentally get rid of any non-viable projects they may have accumulated.

Of course, there are still a number of potential hiccups to this rosy scenario. The first and most important is the completion of the current wage negotiations with the public sector unions, particularly for the current financial year already just begun.

‘Run wid it’ danger

Having just failed its first primary surplus target, at least in dollar terms, the government is now at a critical moment in its IMF programme. If, as expected, the government can show the IMF continued ‘commitment’ to what is to all intents and purposes a ‘legal’ agreement, more familiarly called the IMF programme, then it will not matter to the markets if the IMF calls it a ‘waiver’ or not, as they will deem Jamaica ‘on track’.

If the markets believe, however, that with talk of an election in the air (the Electoral Commission has just been funded), that the government will ‘run wid it’, meaning a budget-busting public sector wage increase in a country that already seems to nearing its taxable capacity, then it could all unravel. I hasten to say, this is not my current view.

We will leave the final comment to Oppenheimer analyst Lucilla Broide. “Luck and continued political savviness will be key for Jamaica to successfully take advantage of the current unique momentum. Hopefully, there will be no major natural disasters that could derail the positive fiscal and growth prospects over the next few years. Also, it will be paramount for Jamaica that the political consensus that has supported the ongoing efforts to put the fiscal accounts back on track continues despite any natural frictions that could occur along the way.”