Aug 2009 Financial News
PM says 'absolutely no chance of Jamaica defaulting on its debt'
Aug 12, 2009
In a televised speech at a Private Sector Organisation of Jamaica (PSOJ) breakfast on Tuesday, Prime Minister Bruce Golding argued that while last week's Sovereign downgrade by Standard & Poor's (S&P) was unwarranted, it "is merely a symptom, not a further cause, of our problems".
He stated that S&P based its decision on the deterioration in the country's fiscal accounts, its weak debt profile, and
the possibility that the Government may engage in a "distressed debt exchange" with its creditors.
Golding observed that in March, S&P had warned of the possibility of a further downgrade unless the Government tightened fiscal policy, achieved the timely disbursement of official financing, avoided any further increases in interest rates, and succeeded in maintaining domestic confidence and exchange rate stability.
Golding said Jamaica had met those March conditions. Its re-engagement with the IMF would allow access to US$300 million of SDRs, and up to US$1.2 billion in stand-by loans.
Prior to the downgrade, market confidence was also strengthening, reflected in the narrowing of bond yields, he noted. Interest rates had also started to come down, in the context of an exchange rate and net international reserves that had been "relatively stable" since February, and a fall in inflation to less than nine per cent over the past 12 months
Finally, the Government had tightened fiscal policy dramatically. Preliminary figures for the end of July revealed that budgetary expenditure was $18 billion below what was originally programmed.
On the other hand, revenues for the same period were also $10 billion below target, demonstrating that the budget cannot afford the seven per cent wage increases scheduled for this fiscal year. Stating that "the buck stops here", the prime minister noted, "we are now combing through the budget, line by line" because "further drastic cuts will have to be made". These "tough decisions" were to be reflected in the Supplementary Estimates to be tabled in Parliament
The prime minister revealed that, according to discussions with S&P, the primary factor in the downgrade was S&P's fear of "selective default", or a "distressed debt exchange".
The Prime Minister maintained, however, that there was "absolutely no chance of Jamaica defaulting on its debt", as Jamaica was one of a very few countries where the prior claim on budgetary expenditure of debt service and repayment are guaranteed by an entrenched provision in the Constitution.
S&P's concern stemmed from its interpretation of a set of options that were put forward by market players for consideration by the government on their own initiative out of a genuine desire to assist the country through this crisis.
Because interest payments constitute the largest chunk of the budget, local market players had floated an idea whereby some existing bonds would be replaced by new, lower-yielding instruments with longer maturities.
He observed that at all times it was clearly understood that this could only be done on a voluntary basis and that it would entail no loss in the net present value of the bonds.
Golding noted that whenever the issue has been raised publicly, in and out of Parliament, he had been at pains to point out that the Government "would never contemplate any reconfiguration of existing debt obligations unless this was fully accepted by those who own the debt."
Arguing that it appears no good deed ever goes unpunished, the PM said that he was nevertheless grateful to those in the financial community who came forward with this idea as "they are prepared to put the country first. However, those who have invested in Government instruments can be assured that the Government has no intention and has never had any intention of interfering with the terms of their investment. Your money is your money and you lend it to the government on terms that you choose. The government will always respect your choice."
Golding argued that although Government must lead, "it can only succeed through collective, collaborative action involving a broad partnership" in which "the Government, Opposition, private sector and trade unions are engaged".
He revealed the medium-term economic programme, designed to support an IMF programme, will set out clear strategies and targets to eliminate the fiscal deficit, and achieve a fiscal surplus by 2015. This would require "benchmarking public sector wage costs to no more than nine per cent of GDP, reducing interest costs to less than 10 per cent of GDP, and restructuring government departments to reduce costs and improve efficiency."
The PM argued, "we are where we are not primarily because of the global crisis, but because of the choices we have made - choosing the easiest way rather than the best way, doing what is easy and convenient rather than what may be painful but necessary."
The theme of Jamaica's historical choices was raised by PSOJ President Joe Matalon in his opening remarks, when he argued that it was not so much that Jamaica was at a crossroads, but that it had passed through a series of crossroads along the road to our current circumstances, each of which represented choices we made for ourselves.
For Matalon, these included the "choice to perpetuate the underlying disequilibrium in our current account balances, to the extent that building foreign exchange earnings and promoting export-led growth became unfashionable notions; facilitated by the growth in remittances and foreign direct investment that served only to mask our chronic underlying underperformance".
Moreover, during the unprecedented international credit boom, "in which the current global financial crisis has its roots", Jamaica "made the choice to avoid those hard policy decisions necessary to curb our chronic fiscal deficits, facilitated by easy access to the international capital markets". He gave as an example our decision to eschew "comprehensive tax reform in favour of ad hoc policy tinkering and uneven enforcement practices", and our preference for "cheap, very often heavily subsidised, imported foodstuffs to the more difficult course of preserving and building upon our agricultural and manufacturing bases by pursuing economic policies designed to enhance the productivity and competitiveness of our local productive sectors".
Finally, Matalon argued the consequences of these choices, exacerbated by the effects of the current global economic downturn, are now plain for all to see, as long before the collapse of Lehman Brothers in September 2008, the cumulative effect of these past policy choices was propelling us inexorably towards our very own home-grown economic crisis, namely one of declining productivity and competitiveness.
Critically, he observed our crisis was also one of debt, as Jamaica's national debt service requirement consumed an ever-increasing proportion of government revenues, and constrained investments necessary to improve the economy's capacity for sustained and accelerated growth. In addition to stifling private initiative through limiting the private sector's access to credit, the national debt simultaneously bid up "the price of what little credit remains in the system
after satisfying government's own requirements."
Article by: Keith Collister
Source: Jamaica Observer
Date Published: Wednesday, August 12, 2009