Magazine article Business Credit

Hot Spots: Jamaica

Magazine article Business Credit

Hot Spots: Jamaica

Article excerpt

International Insight with Hans P. Belcsak, Ph.D.

Having had to abandon such plans twice in 1999 due to unfavorable market conditions, Jamaica in late August succeeded in raising USD 225 million in the international debt markets when it sold its first dollar bond in over two years. To accomplish this, however, it had to rely on the "rarity value" of its paper (it has only two other dollar bonds outstanding) and had to offer interest at 13.125 percent, one of the highest yields on any sovereign bond this year.

Of course, this is still way below the nearly 20 percent that the domestic market would have charged. Moreover, the fund raising was important for Jamaica as it allows the country to refrain from seeking another loan from the IMF. Kingston stopped borrowing from the Washington organization back in 1996, after a wave of popular demonstrations against the austerity regimen, ordered by the body and the government, much prefers not to have to accept such conditions again. International investors are yield-hungry and encouraged by the notion that the U.S. economy is slowing gradually rather than grinding to a sudden halt (conditions in the U.S. have a crucial influence on those in Jamaica). But they are also aware that Jamaica has nagging problems one should not lose sight of.

On the positive side, economic policy is still monitored by the IMF (albeit informally). The government has put out a coherent program for the next couple of years which will cut the fiscal deficit and lower the public sector debt (at present near 145 percent of GDP).There is a blueprint for completing the bank bailout that ended the crisis of the late 1990s, inter alia by privatizing the National Commercial Bank. Considerable progress has been made in economic liberalization and reform, and privatization will be continued with the divestment and expansion of the international airport at Montego Bay this year.

The government must, however, contend with strong interest groups, including the civil service and the labor unions, that are stubbornly opposed to liberal economic policies. It is struggling to manage the huge public-sector debt, of which more than two-thirds is denominated in Jamaican dollars and is, therefore, subject to the high local interest rates (by some accounts, more than 60 percent of government revenue this year will go to servicing existing obligations).

Prime Minister P.J. Patterson insists that the country after four years of recession or stagnation (with a real GDP gain of less than 1 percent in 1999), is poised for substantial growth. He cites a recent trend of single digit inflation, new stability in the foreign exchange market, and an expectation of lower interest rates. So far, however, we cannot detect any hard evidence to support the PM's optimism. In fact, given Alcoa's acquisition of Reynolds Metals earlier this year and Alcan's planned merger with Alusuisse,Alcoa and Alcan, both of which own refineries in Jamaica, have suspended talks on expanding their capacity and have thereby set back the Island's hopes of receiving about USD 500 million in fresh investment capital.

Jamaica's foreign trade balance is chronically deep in the red, with export revenues amounting to not even half the cost of imports. This situation did not change in 1999 or the early part of 2000. …

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