Jamaica Gleaner

PetroCarib­e debt buy-back will ac­cel­er­ate growth

- Ral­ston Hyman

THE GOV­ERN­MENT’S de­ci­sion to re­pur­chase the US$$3.2 bil­lion (J$375.5 bil­lion) PetroCarib­e debt on which it made an­nual in­ter­est pay­ments of J$3.75 bil­lion at 1% per an­num and J$7.5 bil­lion per an­num at 2% per an­num will lead to an ac­cel­er­a­tion of eco­nomic growth, em­ploy­ment cre­ation, and de­vel­op­ment.

This, although the US$1.5 bil­lion (J$176.0 bil­lion) used to pur­chase the debt, at 46 cents to the dol­lar by my cal­cu­la­tion, will at­tract an­nual in­ter­est pay­ments of J$12.5 bil­lion at an av­er­age in­ter­est rate of 7.1% per an­num.

Here is why the PetroCarib­e De­vel­op­ment Fund (PCDF), which was es­tab­lished in 2006 as a re­sult of the amend­ment of the Petroleum Act, is a cor­po­rate body that has its own rev­enue streams and as­sets, as well as li­a­bil­i­ties, which will now be owned by the Gov­ern­ment of Ja­maica.

The fund gen­er­ated some J$5.29 bil­lion in in­ter­est pay­ments and J$39 bil­lion in prin­ci­pal re­pay­ments on its loan port­fo­lio of ap­prox­i­mately J$206 bil­lion as at the end of the 2013-2014 fi­nan­cial year. This rep­re­sented a re­turn of 21% per an­num on the port­fo­lio.

This in­ter­est and prin­ci­pal re­pay­ment in­come stream will now flow straight into the Gov­ern­ment’s cof­fers and, there­fore, the higher cost of ser­vic­ing the US$1.5-bil­lion bond used to buy back the debt will be off­set by the in­ter­est and prin­ci­pal pay­ments which it is gen­er­at­ing an­nu­ally.

DEBT SER­VICE

This, there­fore, means that the ex­tra J$5.0 bil­lion that will now be re­quired to ser­vice the US$1.5-bil­lion bond used to buy back the fund would come from the in­ter­est and prin­ci­pal pay­ments gen­er­ated into the Gov­ern­ment’s cof­fers an­nu­ally. The top 10 bor­row­ers from the PCDF in­clude the Min­istry of Fi­nance (US$934.9 mil­lion), Claren­don Alu­mina Pro­duc­tion (US$259.75 mil­lion), Air Ja­maica (US$195.28 mil­lion), Petro­jam (US$192.0 mil­lion), Port Au­thor­ity of Ja­maica (US$163.0 mil­lion) and Wig­ton Wind­farm (US$99.0 mil­lion), to name a few.

The PCDF has funded projects such as the ex­pan­sion of the coun­try’s ru­ral and ur­ban road net­works, the up­grad­ing of the Nor­man Man­ley In­ter­na­tional Air­port to in­ter­na­tional stan­dards, the Petro­jam Re­fin­ery, the build­ing of the Fal­mouth Pier, and the re­fleet­ing of the Ja­maica Ur­ban Transit Com­pany.

The PCDF is, there­fore, a self­sus­tain­ing fund that will con­tinue to gen­er­ate ad­di­tional in­come into the Gov­ern­ment’s cof­fers. This ad­di­tional in­come will help to com­pen­sate for the in­creased in­ter­est pay­ments and, there­fore, there will be no need to in­crease taxes in or­der to make these fu­ture pay­ments.

The PCDF also plans to spend another J$18 bil­lion to fi­nance in­vest­ments in the energy sec­tor and other in­fras­truc­tural projects dur­ing this fis­cal year, from which it ex­pects to gen­er­ate ad­di­tional in­ter­est in­come.

DEBT/GDP

The buy-back of the PetroCarib­e debt will also help to ac­cel­er­ate growth, em­ploy­ment and de­vel­op­ment be­cause it will lead to a re­duc­tion in the debt-toGDP ra­tio of about 10 per­cent­age points. Why?

The coun­try’s nom­i­nal GDP, which is a mea­sure of the mar­ket value of all fi­nal goods and ser­vices pro­duced last year, be­fore ad­just­ment for in­fla­tion, was J$1.56 tril­lion.

Un­der the cur­rent agree­ment with the In­ter­na­tional Mon­e­tary Fund (IMF), the net PetroCarib­e debt, which ac­counts for about 8.1 per­cent­age points, was in­cluded in the debt-to-GDP ra­tio of 136.7 per cent recorded last year. Re­mov­ing this debt will, there­fore, lead to a re­duc­tion in this vi­tal ra­tio by 8.1 per­cent­age points to about 128.6 per cent. Nom­i­nal GDP growth, or growth be­fore ad­just­ment for in­fla­tion, is ex­pected to push this ra­tio fur­ther down to about 125% by the end of the next fis­cal year.

With a lower debt-to-GDP ra­tio, the Gov­ern­ment will now be able to bor­row more cheaply in the in­ter­na­tional cap­i­tal mar­kets and the pri­vate sec­tor will now be able to get bet­ter credit terms, mak­ing the econ­omy more com­pet­i­tive.

PRI­MARY SUR­PLUS

Re­duc­ing the debt-to-GDP ra­tio faster than pro­grammed for un­der the IMF agree­ment also places the Gov­ern­ment in a bet­ter po­si­tion to suc­cess­fully con­clude the ne­go­ti­a­tions with the IMF to re­duce the pri­mary sur­plus from the cur­rent level of 7.5% of GDP from a purely tech­ni­cal stand­point, since it is de­ter­mined by the debt-to-GDP ra­tio. A lower debt-to-GDP ra­tio would sug­gest that lower and more man­age­able pri­mary sur­plus is nec­es­sary. Low­er­ing the debt-toGDP ra­tio by one per­cent­age point, to 6.5%, would lead to in­ter­est sav­ings of J$17.5 bil­lion an­nu­ally, while a two-per­cent­age­point re­duc­tion would re­sult in sav­ings of J$35.0 bil­lion. These ad­di­tional flows would help the Gov­ern­ment to in­crease the level of in­vest­ments in the coun­try’s cap­i­tal stock ir­ri­ga­tion sys­tems, wa­ter sup­plies, ru­ral farm roads, busi­ness process out­sourc­ing fa­cil­i­ties, so­lar energy plans, na­tional se­cu­rity and jus­tice, small-busi­ness de­vel­op­ment, and ed­u­ca­tion and train­ing, par­tic­u­larly to com­bat the high lev­els of youth un­em­ploy­ment.

NDX PAY­MENTS

The ad­di­tional US$500 mil­lion that was raised has been ear­marked to re­pay the J$62 bil­lion in Na­tional Debt Ex­change (NDX) bonds that will be­come due in Fe­bru­ary next year. This means that there will be no rollover, and this will place the coun­try firmly on a low in­ter­est rate path that would force the banks to fund real sec­tor pro­duc­tive ac­tiv­i­ties such as busi­nesses, con­struc­tion, energy, busi­ness process out­sourc­ing, agri­cul­ture and man­u­fac­tur­ing, as well as ex­port de­vel­op­ment, which will lead to an ac­cel­er­a­tion in eco­nomic growth, em­ploy­ment cre­ation, and de­vel­op­ment.

This US$500 mil­lion will likely be in the cus­tody of the Bank of Ja­maica un­til it is needed and will, there­fore, lead to the bank hav­ing al­most US$1.4 bil­lion more in re­serves than is needed un­der the IMF pro­gramme un­til Fe­bru­ary next year. The bank will, there­fore, now be in a po­si­tion to re­duce the rates on the bench­mark 91day and 182-day Trea­sury bills from 6.44% per an­num and 6.55% per an­num, re­spec­tively.

Ap­prox­i­mately 35% of Ja­maica’s to­tal debt of J$2.04 tril­lion is is­sued at a vari­able rate or at a rate that changes with mar­ket con­di­tions.

That amounts to J$714 bil­lion and, there­fore, a oneper­cent­age-point re­duc­tion in these rates would lead to in­ter­est sav­ings of J$7.14 bil­lion per an­num and a two-per­cent­age­point re­duc­tion would re­sult in sav­ings of J$14.28 bil­lion per an­num. It is, there­fore, clear from the above anal­y­sis that the game-chang­ing PetroCarib­e debt buy-back places the coun­try on a firm path and tra­jec­tory for ac­cel­er­ated eco­nomic growth, em­ploy­ment cre­ation and em­ploy­ment, con­trary to what the par­lia­men­tary Op­po­si­tion is say­ing.

Ral­ston Hyman is a busi­ness re­porter work­ing with Power 106 FM. Email feed­back to col­umns@glean­erjm.com and re­al­busi­ness@ power106-ja.com.

 ??  ?? The sum of US$500 mil­lion will likely be in the cus­tody of the Bank of Ja­maica un­til it is needed and will, there­fore, lead to the bank hav­ing al­most US$1.4 bil­lion more in re­serves than is needed un­der the IMF pro­gramme un­til Fe­bru­ary next year,...
The sum of US$500 mil­lion will likely be in the cus­tody of the Bank of Ja­maica un­til it is needed and will, there­fore, lead to the bank hav­ing al­most US$1.4 bil­lion more in re­serves than is needed un­der the IMF pro­gramme un­til Fe­bru­ary next year,...
 ?? RI­CARDO MAKYN/STAFF PHO­TOG­RA­PHER ?? Fi­nance Min­is­ter Peter Phillips has been bullish about the prospects of net sav­ings from the PetroCarib­e debt buy-back.
RI­CARDO MAKYN/STAFF PHO­TOG­RA­PHER Fi­nance Min­is­ter Peter Phillips has been bullish about the prospects of net sav­ings from the PetroCarib­e debt buy-back.
 ??  ?? GUEST COLUM­NIST
GUEST COLUM­NIST

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