Jamaica is not Greece, but it needs to change its economic model urgentlySunday, April 29, 2012
BY KEITH COLLISTER
FOR the past week, Jamaica's economic team, led by Minister of Finance Dr Peter Phillips has been presenting to international bankers and investors on the Jamaican economy and our way forward.
The meetings started in Washington with the International Monetary Fund (IMF) on Monday and Tuesday, moved to Boston on Wednesday, and New York on Thursday and Friday.
Although the IMF is called a fund, they are really a bank, and are in fact currently our primary bankers by virtue of the large borrowing programme Jamaica has with them, which officially ends in May. Like any other bank, they want to know how we will repay our debt in the medium term, and in the short term, how we will get on track with the current lending programme. It is basically irrelevant as to whether it is an extension of the old agreement, or an entirely new agreement.
If we perform the thought experiment of regarding Jamaica as a company, the first thing that would become clear is that the government wage and benefits bill (namely pensions) is too large compared to revenues, meaning that the company is uncompetitive. Clearly the uncompetitiveness is not confined to the public sector, but we will leave this aside for the purpose of the thought experiment as we are focussing on the government's ability to pay. One would also note that interest costs, despite nearly halving as a result of the restructuring known as the Jamaica Debt Exchange (JDX) are still too high, and that the schedule of debt repayment is too short term, particularly now that the breathing space from the JDX is expiring. It would also be clear that insufficient money was being spent on programmes (the raw material of progress) and capital (the machines of the future) for Jamaica to break out of its low growth trap.
In short, Jamaica's chief financial officer, Minister Peter Phillips has the very difficult job of selling a company, Jamaica, that is clearly still in need of turnaround.
As Oppenheimer's Dr Carl Ross notes, "Jamaica's decision to issue in the international markets comes at a time when two other major items are on the table — the FY2012/13 budget, and the IMF programme. Some investors may want to see progress on those two before committing to a new issue."
According to some of the international investors Dr Ross spoke to, Phillips did a good job, and came across well as very serious and knowledgeable. Ross adds:
"The policy team is viewed as being very credible. Several investors have told me that the delivery was good, but the message is a challenging one at this juncture."
Jamaican fund manager Sean Newman, who invests in emerging markets around the world for US giant General Electric, and was briefly part of one of the New York conference calls of Jamaica's economic team, has a number questions that he thinks international investors need answering.
Firstly, he believes Jamaica "needs to lay out a clear timetable for renewal of the IMF agreement". It was his impression that it is unlikely to be in May.
Secondly, international investors "need a clear statement with regard to the external debt. For example, that there is no external debt restructuring planned."
Thirdly, Jamaica needs to present a "timetable of divestments of non-strategic assets" particularly if it is planning to make investments in other strategic areas of the economy.
In his view, the critical issue of the negotiations with the public sector over the wage bill will of course also need be answered as part of the IMF agreement.
What all of this suggests is that now is the time to make the hard choices for a government early in a new five-year term with a strong mandate. People will make sacrifices and endure pain if there is a credible vision and leadership as to where the country is going to go. Although there is still a path to debt sustainability, it is a narrow one, and requires a cooperative approach from all the stakeholders in the society.
For example, Jamaica needs to urgently build on the nascent shift from debt to equity signalled by the success of the Junior Stock Exchange. One fact often overlooked by international commentators, and perhaps even given insufficient weight by our multilateral partners, is that Jamaica's overall debt to GDP ratio (which includes private sector debt) is not particularly high, at significantly less than 200 per cent of GDP, a number which itself is about half of the approximately 400 per cent debt to GDP of many countries internationally. A rough estimate of bank lending to the private sector is about 30 per cent of GDP, which if added to the overall government debt would be approximately 160 per cent of GDP. Whilst this may not be the full total debt figure, what it shows is the huge unrealised potential for private sector credit expansion and growth, with many developed countries having up to 10 times Jamaica's level of private sector credit as a percentage of GDP, or even more. There is therefore the potential to grow our way out of debt without further restructuring, namely a new JDX, but it will require an unmatched focus on encouraging private sector investment over government investment, and encouraging equity over debt, with a clear plan to mobilise not only local savings, such as those of pension funds, but the overseas savings of local Jamaicans and the diaspora. We are still waiting for such a plan, and the clock is ticking.