Jamaica Seeks Second Debt Exchange as Bank Reserves PlummetEric Sabo and Veronica Navarro Espinosa
Jamaica will restructure local debt for the second time in three years as the Caribbean island struggles to boost economic growth and secure a new accord with the International Monetary Fund.
The government will ask bondholders today to exchange 860 billion ($9.1 billion) of higher interest Jamaican dollar debt for lower yielding bonds, Finance Minister Peter Phillips said in a speech last night with Prime Minister Portia Simpson Miller. While there will be no “haircut” on the principal, investors will face “significant sacrifices,” he said.
“Many of our bondholders, with good reason, will immediately respond to this announcement with a sense of disappointment as they recall they made a similar sacrifice three years ago,” Phillips said. “It will be painful and difficult, but we have no option.”
The drop in interest payments will enable the government to reduce its debt to 95 percent of gross domestic product within seven years from 140 percent today and revive growth, Simpson Miller said. The economy shrank 0.6 percent in the third quarter, the third consecutive contraction, while central bank reserves tumbled to about $1 billion from a peak of $2.6 billion in 2011, the year after Jamaica’s previous restructuring.
“We have not delivered on expectations of growth and development,” the prime minister said. “As long as our debt as a percentage of our economy remains this high, our capacity for growth and development will be severely limited.”
Standard & Poor’s cut Jamaica’s credit outlook to SD from B-/B and expects to lower the rating to a CCC category after the new bonds are issued.
“A high debt burden and weak external liquidity position will constrain the new sovereign rating after the debt exchange is completed,” S&P said in a report today.
Jamaica is one of at least five Caribbean nations to restructure its debt since 2004. Grenada missed a Sept. 15 payment on $193 million of bonds before paying investors within a 30-day grace period. Belize is finishing negotiations on its second restructuring in five years, after missing a $23 million coupon payment in August.
“Belize and Jamaica have been outliers in terms of their very high debt burden, hence they are more prone to seek debt service relief from time to time,” Marcela Meirelles, Latin America strategist at TCW Group Inc. in Los Angeles, which oversees $128 billion of assets, said in an e-mail. “I don’t think there is a broader problem in the Caribbean”
‘Weak Economic Growth’
“The positive effects of the first debt exchange have been diluted by weak economic growth and weak fiscal performance in the intervening years,” Carl Ross, a managing director at Oppenheimer & Co. in New York, said in an e-mail. “The size of the debt problem would have warranted a broad restructuring that would include domestic and external debt, but clearly the authorities thought the cost of that approach out-weighed the benefits.”
The Caribbean nation swapped $7.8 billion of local bonds for securities with longer maturities and lower interest rates in 2010, when its debt burden exceeded 120 percent of GDP. The accord paved the way for Moody’s Investors Service to raise Jamaica’s credit rating and the IMF to approve a 27-month, $1.27 billion stand-by credit.
The yield on Jamaica’s local bonds due in 2019 reached a record 9.8 percent last week. In trading today, the yield fell 31 basis points, or 0.31 percentage point, to 8.71 percent today.
The Jamaican dollar gained 0.1 percent to 94.38 per U.S. dollar at 5:00 p.m. local time. The currency has lost 4 percent against the dollar in the past three months and 24 percent the past five years, the worst performance among 20 Latin American and Caribbean currencies tracked by Bloomberg after the Argentine peso.
“A successful debt exchange will require high participation from creditors to help secure financing assurances for a Fund-supported program,” the IMF said in a statement following yesterday’s announcement. It didn’t give details of its possible accord with Jamaica.
The extra yield investors demand to hold Jamaica’s dollar bonds instead of U.S. Treasuries fell by 49 basis points, or 0.49 percentage point, to 622 as of 5:00 p.m., according to JPMorgan Chase & Co.’s EMBI Global Diversified Index.
Fitch Ratings lower Jamaica’s credit outlook to negative on Jan. 18 and then downgraded it today to C from B- because of the debt exchange.
Growth in Jamaica’s $14.5 billion economy will accelerate to 1.5 percent in 2017 from 1 percent this year, the IMF said in an October report, the slowest pace among 32 nations in Latin America and the Caribbean.
“The numbers say it all: for every dollar of the budget that we spend approximately 55 cents goes to pay the debt, another 25 cents to pay wages which leaves just 20 cents to fix roads, maintain schools and hospitals and provide other critical services for the Jamaican people,” Phillips said. “It just isn’t enough.”