Central bank bullish on GOJ global bonds

THE BANK of Jamaica (BOJ) is holding firm to its projection of above-average performance for Government of Jamaica (GOJ) global bonds, which have outpaced other emerging market issues in recent years.

In its most Quarterly Monetary Policy Report issued for the March 2017 quarter, the central bank noted that average yields on GOJ global bonds as well as the spreads between these yields and benchmarks, such as JP Morgan’s Emerging Market Bonds Index Plus (EMBI+) and US Treasuries, have fallen to record low levels, indicating that reform under way in Jamaica is viewed favourably by the international capital market.

Yields for bonds maturing within the next four years are within the range of 0.47 per cent (2017) to 4.92 per cent (2020). For the bonds of longer tenure yields are currently below seven per cent.

Sovereign ratings, the central bank outlines, is connected to the increasing trust of the market in the Government’s commitment to IMF-backed economic programmes.

These commitments allowed Jamaica, in July 2015, to issue a dual-tranche bond in the amount of US$2 billion, described as the largest bond and lowest coupon — money used to pay down PetroCaribe debt.

Jamaica has eleven bonds outstanding on the international market, valued at US$5.6 billion, or approximately 55.1 per cent of total external debt. Their tenors range between two and 30 years and coupons range between 5.25 per cent and 11.63 per cent.

The BOJ notes that there is a general sense that these bonds are not traded frequently, adding that in this context, ask yields at end-March ranged between 2.91 per cent and 6.67 per cent.

SOVEREIGN RISKS

In general, the central bank said, the behaviour of the GOJ bonds yields and spreads have been linked to perceptions relating to Jamaica’s sovereign risks. Between July and December 2009, for example, a composite of the individual yields rose by 98 basis points, which translated into a rise in spreads of 79 and 221 bps relative to the US treasury and EMBI+, respectively.

“This indicated market uncertainty about Jamaica’s economic future as the GOJ’s access to markets was terminated and rumours escalated about the possibility of a debt default,” the central bank report outlined.

In January 2010, after the announcement of Jamaica’s first debt exchange, which excluded holders of Jamaica’s external debt yields and spreads fell progressively until June 2011, except for a short period in May 2010.

In May 2013, the GOJ embarked on another economic reform programme, an extended fund facility (EFF). The BOJ noted that the reaction from the global market was favourable as spreads, relative to the US Treasuries and EMBI+, fell dramatically to 5.33 per cent and 1.96 per cent, respectively, by end-December 2013,

The EFF was terminated and replaced with a Stand-By Arrangement (SBA) in November 2016, which the BOJ says has positively impacted investor confidence as reflected in GOJ spreads over EMBI+ being negative by December of that year.

“This means that Jamaica has enjoyed, over the past year, pricing of its bonds that are better than its peers who are in a higher ratings category,” the central bank said.

The report concluded that Jamaican global bonds are expected to remain attractive over the medium-term “in the context of continued improvements in the country’s macroeconomy and debt sustainability indicators”.