Building for recoverySunday, September 19, 2021
Finance Minister Dr Nigel Clarke says he is hoping the “multi-layered risk management approach” that is now being implemented to financing recoveries after natural disasters will be institutionalised.
Dr Clarke was responding to the Jamaica Observer about non-ratings commentary from Fitch Ratings late last week about the World Bank-issued catastrophe bond (Cat bond) for US$185 million which is equivalent to approximately 1.3 per cent of gross domestic product (GDP). Fitch, in the commentary, said the bonds which were issued in July “benefits Jamaica's Government as it significantly strengthens its natural disaster risk-mitigation strategy”. The purpose of the Cat bond is to insure the Government against named storms and hurricanes. The bond expires on December 29, 2023 and does not add to Jamaica's national debt.
“We have to take account of our vulnerability to natural disasters. We have to plan for today as well as for tomorrow. That is what we are doing with the US$185-million Cat bond issue,” Dr Clarke told Sunday Finance. “Together with our US$285-million Credit Contingent Claim from the IDB (Inter-American Development Bank), the Contigency Fund, (US$29 million), our National Disaster Fund and the Caribbean Catastrophe Reinsurance Facility (US$82 million for tropical cyclone), we are implementing a multilayered risk management approach with the aim of being able to finance the emergency costs of natural disaster and thereby preserve macro-economic stability through the worst kinds of tropical cyclone and hurricane, allowing for a quick recovery. It is important that this is institutionalised and continued over the long term for the good of Jamaica”, he added.
The latest major hurricane that could've seen Jamaica calling on the bond was Sandy in 2012 which had an estimated total destruction of 0.8 per cent of GDP. Fitch estimates on average Jamaica will record an annual loss due to hurricanes and flooding of 0.9 per cent of GDP which is equivalent to about US$125 million or J$18.75 billion. It is estimated that a one-in-50 years weather event could cost roughly 10 times that amount. Fitch Ratings, citing a 2014 IDB loss distribution publication, showing such a weather event could cost US$1.3 billion or about 8.8 per cent of GDP.
“Recent hurricanes show how disruptive they can be to the public finances of small island economies”, Fitch remarked. It also pointed to data which showed that Maria which hit Puerto Rico as a category 4 hurricane where the estimated destruction was equivalent to 78 per cent of gdp in 2016.
The US$185 million bond is currently financed by donors led by the UK, US and Germany. Fitch estimates that the annual cost of the monthly coupon payment is US$8.3 million. Clarke had stated before that once Jamaica's debt is down, the country will pay for the renewal without outside help. Fitch says it expects that to start in 2024.