Why meeting IMF targets is not enough reason to celebrate (Part 1)
MOST countries celebrate their independence on a special day just once a year; but in Panama, there are three days of pomp and pageantry. There is certainly much to be festive about in this small, proud country that has seen a decade of stratospheric economic growth. By day massive brass bands beat the streets, and by night the skies are aflame with fireworks and the bars are bursting with locals and gringos alike.
But it hasn’t always been champagne and fireworks for Panama. For many generations it was a poor, distant province of Colombia. On November 3rd,1903 it seceded and was recognised by the US government three days later. Within two weeks it had ceded ownership of the Canal Zone lands to the US who completed the Canal in 1914 and ran it until 1999, long after Panama’s President Torrijos had the cojones to demand of President Carter in the late 1970s the return of his patrimony.
That singular act of political courage ignited the nation and delivered to the state the means to seriously accelerate economic growth. The Canal Expansion plan was overwhelmingly approved by a national referendum in 2006, and works began in 2007. In April 2016, the new locks will be opened to the megaships that are the new galleons of our globalised world, and a bold new chapter written in Panama’s history… what a party that’s going to be!
No fiesta in Jamaica
Just 500 miles to the north lies Jamaica, source of much of the labour that built the Canal. Many of those Jamaicans stayed in Panama and their descendants have became a colourful part of the social fabric, but few venture to return to their ancestral homeland… not because Jamaica’s party is over, but because nobody knows when it’s ever going to begin.
That’s because to have a party, you need a reason to celebrate; meeting IMF fiscal targets won’t cut it, swapping out PetroCaribe debt won’t do it, and neither will an Obama pit stop. Jamaica needs game changers, and big ones. Big enough to really ignite the public imagination, and broad enough to fully engage popular support.
Unfortunately there’s no Canal; so what does Jamaica have that’s big and broad that it can retool? Let’s see: the Russians own the bauxite, and the French the highways… the Spanish hold the hotels, the Canadians control the banks, the Trinis got the cement, and the Chinese will take whatever they please …so what’s left to play with?
Oh right — the one thing nobody seems to want — that tidal wave of debt that threatens to send our future generations into economic slavery; what could we possibly do with that swelling sea of future promises? Whose debt is it really anyway? Nobody voted for it, only a precious few profit from it, and everybody seems to think it’s somebody else’s problem. Jamaica is a debt addict, in dire need of alternative therapy, because the IMF meds are crippling its chances of full recovery.
A case in point: poverty has doubled in Jamaica since 2007 (IMF), unemployment is at record highs, crime is rampant, social services are in decline, public investment is negligible, and state finances continue to be subsidised by Venezuelan and Chinese financing. All this, and oh yes, two debt restructurings in three years, JDX and NDX ..and still the debt remains at an unsustainable level. Jamaicans are living in a debt crack house, and it’s time to send in the shock troops…not to get more dealer credit.
Other countries fought and bled during their IMF negotiations: Greece was and still is Europe’s worst debt addict, with a debt/GDP even greater than Jamaica’s, at 165 per cent. They negotiated a 3 per cent fiscal primary surplus with the IMF/WB/ECB troika, but first had to go through massive street protests, a referendum, and a fierce election battle before everybody got aboard the three per cent bus.
With a 2012 debt/GDP ratio of 140 per cent, Jamaica negotiated a draconian primary surplus target 2.5 times higher than that of Greece at 7.5 per cent; the nation’s cupboards have since been stripped bare in exchange for a series of emergency fixes from the IMF/WB/IDB triad… a socially explosive stage has been set, the public mood is grim, and the 7.5 per cent JEEP is stalled.
But it gets worse; it’s tough for people who have never actually done it before to radically increase the GDP; so instead, management’s focus is on nudging down the debt. Witness the recent PetroCaribe debt buyout deal; low-cost, long-term sovereign debt (2.0 per cent, 65 years) has been bought by Jamaica at a deep discount … using, however, high-cost, short-term market debt (7.0 per cent and seven years) to do so.
The residual debt from this deal will be financed from PetroCaribe Fund assets; these investments were primarily made with state actors (Ministry of Finance (MoF), PCJ, Port Authority, NROCC, etc); none of these entities actually make real profits of their own… they all just feed from the same public tax trough.
The motive for the PetroCaribe deal was genuine, the state actors earnest, and the math apparently compelling; in buying out the discounted PetroCaribe debt the MoF ostensibly sought to reduce Jamaica’s debt/GDP ratio, and thereby generate some fiscal breathing space in meeting its IMF-mandated 7.5 per cent primary surplus metric.
Thinking fast
But behavioural psychologists warn us against precisely this kind of institutional tendency: it’s called ‘thinking fast’… reflexively pursuing known quantums because they are familiar objects within perceived control…but in the habitual pursuit of false positives (IMF tests, tax revenues, debt metrics), fast thinking confuses causality and misses the bigger picture.
If shaving a thin slice off the national debt results in a few millimetres of wiggle room for fleeting public investment, then kudos… but how will that really change the end game for the many hundreds of thousands in distress?
Since net asset value (NAV) pricing models do not measure socioeconomic costs, articulating the uncertain benefits of serial debt restructuring is simply not enough…there must be a real upside for the Jamaican people, who perennially foot the debt bill.
Public engagement is a fundamental component in establishing political credibility; without it, we are only left to wonder who shared the big deal fees and what the true costs of this tactical fait accompli will be. One thing is for certain, there is plenty more IMF prescribed pain to come, election or no election …the PetroCaribe debt deal will not change that…a 130 per cent debt to GDP ratio is still very dangerous territory.
Some might well argue that the worst is past, that the corner has been turned, that fiscal performance has been exemplary, and that the recent US$2 billion sovereign debt issue was a signal that capital markets were rewarding a job well done. Really?
Oil prices down
A closer look at the numbers reveals a deeper truth: oil price declines have reduced state expenses and masked fiscal underperformance; this pleasant co-incidence should not necessarily be construed as extreme competence, and 7.85 per cent is a penal rate by global standards.
But the NIR now nearing a record US$3.0 billion, versus just US$1.0 billion just two years ago…isn’t that progress? Beware another false positive: that big stash of cash has been largely bought with borrowed money or deferred investment. Is this carefully stored economic ammunition, or just an expensive political status symbol? The answer to that question will in large part determine Jamaica’s growth trajectory (or lack thereof) in our time.
Future debt abstention and a productive investment programme will build a sustainable economic model, while a return to debt addiction and trophy projects will squander this precious national treasure in a heartbeat.
In meeting austere fiscal targets, the capital budget has been slashed, and important development projects languish in the pipeline.
Let us be mindful that market-sourced sovereign debt is risk-rated and priced accordingly; this rating is a matrix of current financial status and future economic capacity. The current focus on fiscal performance comes at the cost of public investment in future economic growth, keeping Jamaica’s risk profile and its debt pricing high…this is the fundamental policy dilemma of the MoF.
Roger Brown is the founder and managing director of Panama-based Risk Control S.A., which provies investment advisory, asset protection and offshore financial services to international clients. Through Professionally Panama, its business concierge platform, it also provides custom corporate, health and hospitality services.