Is Jamaica the Greece of the Western Hemisphere?Tuesday, January 08, 2013
YESTERDAY the Chicago Tribune (President Obama's major hometown newspaper and one of the top five newspapers in the US) wrote an editorial with the title "Jamaica's Debt Hurricane", subtitled "The Greece of the Western Hemisphere". The editorial argued that Jamaica, like Greece, "illustrates the catastrophic effects of borrowing way too much, and the painful choices that follow".
In analysing the editorial's comparison of Jamaica and Greece, it is first necessary to correct a couple of factual errors. The editorial made the very strong statement that Jamaica "is in worse financial shape than Greece: Jamaica has more debt in relation to the size of its economy than any other country". If this statement is measured by the debt as a percentage of GDP, then Greece, with debt between 160 to 170 per cent of its GDP even after a very onerous debt restructuring (reduction) in March 2012, is clearly much worse than Jamaica, with a debt of between 130 to 140 per cent of GDP, depending on whether you include our Petrocaribe debt.
Looking internationally, Lebanon's debt to GDP appears to be around the same or a little above that of Jamaica, whilst Japan, St Kitts and Zimbabwe all have much higher debt to GDP ratios of nearly 200 per cent or more. However, Japan's very low interest-servicing costs and trillions of net international reserves and foreign direct investments put it in a very different place than either Greece or Jamaica. St Kitts restructured its debt in 2012 so that its debt to GDP ratio should now be close to 100 per cent, and the extreme political and economic situation in Zimbabwe does not make it a particularly useful comparison. The most interesting comparison is actually Lebanon, which, like Jamaica, relies mainly on private markets, both domestic and internationally, to finance a very high level of public debt. However, unlike Jamaica, in addition to its own highly developed domestic financial system, Lebanon has access to middle east oil companies still happy to park money in its banking system, which it then recycles into Lebanon's government debt market. It is also true that Jamaica undoubtedly has one of the highest, if not the highest, interest and overall debt-servicing costs as a percentage of its revenues, which is probably an even more important metric than the debt to GDP ratio.
Another statement the editorial makes that also appears incorrect at first glance, namely that "It has tried to restructure its loans to stretch them out over more years, at lower interest rates, with no success". Jamaica successfully restructured its private sector domestic debt in February 2010, the so called Jamaica Debt Exchange (JDX), with substantial savings in annual interest costs of just under four per cent of GDP and a significant lengthening in the maturity of the debt. What the editorial may however be referring to is that this breathing space has now ended, with about US$320 million and just under J$90 billion in principal and interest payments from the JDX coming due at the end of February.
The editorial is however correct to say that "The only thing worse than doing what Jamaica must do, to live within its means, would be not doing it", referring to the need to reform taxes, curb pension costs and cut public payrolls, as "necessary in Jamaica as it is in Greece and other countries mired in debt". It should be noted that Greece has already endured much deeper austerity than Jamaica, with a dramatically higher cyclically adjusted reduction in its fiscal deficit since May 2010, including a sharp reduction in the nominal public sector wage bill. This has included the elimination in 2010 of two extra months' salary (the so called 13th and 14th month) paid to the public sector, followed by a nearly 20 per cent reduction in 2011 as part of its joint IMF/EU programme, and is planning to reduce the public sector workforce by 150,000 between 2010 and 2015. Despite this austerity, Greece may still miss its original primary balance target for a primary deficit of about one per cent of GDP (still a massive reduction in its primary deficit by about 90 per cent). This means, however, that excluding interest costs, expenditure still exceeds revenues in Greece.
This is unlike the case in Jamaica, where revenues exceed expenditures, our so called primary surplus, so that we pay for about half our interest costs from the surplus of tax revenues. The level of primary surplus required to reduce our debt to GDP ratio appears to be one of the main sticking points with the IMF. In Greece, the economy, and therefore tax revenues, performed much worse than expected, which required much tougher austerity measures to get it back on track -- a clear and present danger in Jamaica at this time. The Greek situation should also be a warning to our Government and public sector to take tough measures quickly, as it was the huge rise in financial uncertainty and the consequent collapse in the economy that made much tougher expenditure reduction measures necessary.
Finally, the editorial notes that "The lesson of Jamaica is not that access to credit is bad. It's that irresponsible stewardship is bad", and concludes that "we'll see whether other countries learn the lesson of Jamaica: Stop digging such deep, deep holes in the beach". Another way of putting this is deal with problems early, rather than letting them fester, as has occurred in Jamaica.