LAST week the Government of Jamaica (GOJ) issued two new US-dollar denominated global bonds: a 6.75 per cent coupon instrument with a maturity date of 2028 (JAMAN 2028) and a 7.875% per cent coupon instrument with a maturity date of 2045 (JAMAN 2045). Both instruments have caused a bit of a buzz on both the domestic and international financial scene. But why is this so?

Firstly, both instruments were heavily oversubscribed, indicating that there is demand for GOJ securities in the international financial market space. While the government accepted a total of US$2.0 billion for the combined issuances (US$1.35 billion for the JAMAN 2028 and US$650 million for the JAMAN 2045), the market demand was closer to US$4.75 billion. The debt issuances also represent the largest amount of financing ever raised by the GOJ and at the lowest cost (i.e. coupon) or interest rate. The previous largest was the US$800 million raised in 2014 for the JAMAN 2025’s.

in addition, approximately US$1.5 billion from the US$2.0 billion raised will be used to pay off PetroCaribe debt; the remaining US$500 million will be used for budgetary support.

It has been reported that Jamaica will pay Venezuela US$1.5 billion in exchange for PetroCaribe debt forgiveness of about US$3.0 billion. This move will not only reduce Jamaica’s debt/GDP ratio but it will also create significant goodwill with Venezuela which is facing tremendous cash flow/liquidity shortages at this time. The goodwill extended by Jamaica argurs well for the long-term PetroCaribe relationship.

Thirdly and perhaps most importantly, the debt forgiveness from Venezuela is estimated to reduce Jamaica’s debt/GDP by approximately nine percentage points.

This means that Jamaica’s debt/GDP ratio could officially decline from 140% to 131% (inclusive of the PetroCaribe debt). If we exclude the PetroCaribe debt, then the debt/GDP should decline to about 125%. This is a significant reduction in our debt ratios and is the primary reason for the “buzz” surrounding Jamaica’s debt and fiscal dynamics at this time.

More expensive financing

Please note, however, that while the debt/GDP ratio should decline, we are effectively replacing cheap PetroCaribe debt with more expensive international capital market financing. Consequently, on the fiscal side, the deficit target for the year could come under pressure and will require continued tight management.

However, there is a further positive! With the reduced debt dynamics, the possibility of a rating upgrade or at least a positive outlook combined with the fact that the GOJ may not need to come to the local market for financing — domestic interest rates could decline.

This would reduce domestic interest expenditure on the fiscal side and improve the prospects of meeting the deficit target.

Note also that Jamaica has several upcoming maturities, which means that access to the international capital markets on good terms is vital. Raising low-cost funding for long tenors is the preferred strategy and one that Jamaica has been successful at with the issuance of the new JAMAN 2045.

Over the next seven years the JAMAN 2017, the JAMAN 2019, JAMAN 2021 & JAMAN 2022 are all scheduled to mature. This means that the GOJ will have to tap the market for about US$1.5 billion over the next seven years. Note also that this does not include domestic maturities.

Jermaine Burrell is the senior economist and sovereign research manager in the JMMB Group research and risk department.