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Financial News

Oct 2014 Financial News

Huge rally in Jamaican Eurobonds this year but growth still lacking

Oct 17, 2014

On Wednesday, in an article entitled "Jamaica IMF progress spurs tightest spread compression across EM", coming out of the recent International Monetary Fund (IMF) conference in Washington, global news provider Reuters Thomson noted that Jamaican bonds are proving to be one of the top performers across emerging markets (EMs) this year as "markets grow more confident that the country's economy is finally turning the corner."

Reuters noted that the 177 basis point rally in the sovereign's bond spreads so far this year marks the largest compression of any EM country in JP Morgan's Emerging Markets Bond Index (JP EMBI) as investors cheer the island's progress in meeting targets set by the International Monetary Fund.

This means that the yield fell 1.77 per cent verses the benchmark US treasury bond. For example, the offer yield on the recent 11 year Eurobond maturing in 2025 issued in July with a coupon of 7.625 per cent has fallen to 6.33 per cent according to Oppenheimer, as of yesterday, from above eight per cent at the beginning of the year for a similar bond.

From a total return perspective, Reuters advises, Jamaica's international bonds have gained 20.2 per cent year to date, trailing only Belize and Honduras, which posted gains of 24.1 per cent and 22.4 per cent respectively.

The JP Morgan EMBI index, on the other hand, has returned 7.8 per cent, with its average spread widening by 23 basis points (one basis point is one hundredth of one percent) compared with US treasuries.

Dr Carl Ross, one of the leading analysts on Jamaica from his time at Oppenheimer and Bear Stearns, and now sovereign analyst at huge Boston-based asset manager GMO, told Reuters "There was a lot of skepticism at the beginning of the year that Jamaica would stick to the timing of the IMF programme." He added however "But they are on track. Oil prices are falling and the economy is showing small signs of growth, so on balance it's been a very good year."

Jamaica's Minister of Finance and Planning Peter Phillips told Reuters in an interview over the weekend "We are anticipating that going forward to 2016/17 our basic financing will be covered by multilateral support and bilateral support. What we are concerned about is not to disrupt the reduction of our stock of debt as built into the (IMF) programme and we are pretty rigid about that."

Reuters noted that officials did not rule out the possibility of market transactions to retire expensive debt or to smooth out the country's debt profile, but any such moves would be opportunistic and dependent on market conditions.

Bank of Jamaica Governor Brian Wynter added that "With the fiscal accounts in balance or small deficits going forward, what we are discussing is really refinancing. The debt management strategy is around that. It will be well planned but also opportunistic where appropriate."

The government plans to cut the island's debt-to-GDP ratio from the current 140 per cent of GDP to 97-98 per cent by 2020 and to 60 per cent by 2025, with potential for even greater improvements if growth picks up steam.

"That of course is predicated on a very modest growth outlay," said Phillips. "Where we are putting our energies now is to try to augment the rate of growth in the economy as a whole and hopefully we can improve on those dynamics." The government is now projecting GDP growth of between one per cent and two per cent for the fiscal year 2014/15, with the rate is expected to increase to between 2.5 per cent and three per cent in the following fiscal year, as a number of infrastructure projects get underway.

Reuters report Ross as adding "they are not out of the woods, but so far it looks like they are doing everything they can to help themselves. The missing ingredient is growth. If they keep controlling the budget as they have done for the past year or two, their debt-to-GDP ratio could come down rapidly."

Investment Bank JP Morgan, in yesterday's report on the highlights from the 2014 IMF/World Bank annual meetings, stated that "The government commitment to the programme has been remarkably strong, producing the desired fiscal adjustment during the first year of the programme implementation." They note the primary surplus widened from 5.4 per cent of GDP in fiscal year 2012/2013 in fiscal year to 7.6 per cent in fiscal year 2013/2014, and the nominal balance swung from a deficit of 4.1 per cent of GDP to a 0.1 per cent surplus, a positive adjustment of more than four per cent of GDP. JP Morgan believes the July bond issue "will allow the government to cover its market debt maturities through mid-2015. Foreign reserve coverage currently stands at around 17 weeks of imports, an adequate level, and is expected to climb to 20 weeks over the life of the IMF four-year programme."

However, JP Morgan add that "Despite staying on track up to this point, there are a number of lingering risks that could threaten successful completion of the IMF programme." They list them as "the speed of growth and investment recovery, the fate of Venezuela's Petrocaribe financing scheme, heavy exposure of the domestic financial sector to public sector debt, lack of progress in passage/implementation of pending reforms (such as revenue administration and power sector), and diminishing commitment to the reform process prompted by changes in political priorities."

Sean Newman, a Jamaican investor in emerging market debt based at international fund manager Invesco, commenting on the rise in Jamaica's Eurobond prices, observes "I think Jamaican Eurobonds can rally even further from here as the market is now rewarding the government's efforts in meeting the IMF targets. Also, like the Dominican Republic, Jamaica's current account clearly stands to benefit significantly from lower oil prices, which have fallen by around twenty dollars a barrel. Jamaica is kind of on cruise control right now, in that its short term financing needs have been met. I am still cautious on the growth rebound as the sources of green shoots still have to materialize for Jamaica, and global growth risks have increased everywhere, including for the US. However, with the US ten year bond flirting with a two per cent yield, Jamaican ten year paper at 6.67 per cent (bid yield) is still regionally attractive compared with Bahamas at 4.8 per cent, Dom Rep at 5.3 per cent, and Honduras at 6.7 per cent."

 

Source:
Keith Collister
Jamaica Observer

Friday October 17, 2014  

http://www.jamaicaobserver.com/business/Huge-rally-in-Jamaican-Eurobonds-this-year-but-growth-still-lacking_17759403