Identifier
Created
Classification
Origin
05KINGSTON2797
2005-12-30 16:47:00
CONFIDENTIAL
Embassy Kingston
Cable title:  

BOND. JAMAICAN BOND. LESS ATTRACTIVE THESE DAYS.

Tags:  ECON EFIN JM 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 02 KINGSTON 002797 

SIPDIS

STATE FOR WHA/CAR (BENT),EB/IFD/OMA (JUNCKER)
TREASURY FOR LAMONICA

E.O. 12958: DECL: 12/30/2015
TAGS: ECON EFIN JM
SUBJECT: BOND. JAMAICAN BOND. LESS ATTRACTIVE THESE DAYS.

Classified By: CDA TIGHE FOR REASONS 1.5 (b) AND (d).

C O N F I D E N T I A L SECTION 01 OF 02 KINGSTON 002797

SIPDIS

STATE FOR WHA/CAR (BENT),EB/IFD/OMA (JUNCKER)
TREASURY FOR LAMONICA

E.O. 12958: DECL: 12/30/2015
TAGS: ECON EFIN JM
SUBJECT: BOND. JAMAICAN BOND. LESS ATTRACTIVE THESE DAYS.

Classified By: CDA TIGHE FOR REASONS 1.5 (b) AND (d).


1. (C) Summary. The International Monetary Fund (IMF) gave
its assessment of the Jamaican economy as part of the
conclusion of its yearly Article 4 consultations with the
Government of Jamaica (GOJ). Ratna Sahay, the Assistant
Director of the Western Hemisphere Department for the IMF,
acknowledged that the GOJ was likely to miss its target of a
balanced budget. While she praised Jamaican openness to
investment, Sahay reminded the GOJ that high crime and
ineffective disaster management hindered economic growth and
should be addressed. Meanwhile, the GOJ announced an
unlimited USD bond offer at 8.125 percent on the local
capital market after the failure of two consecutive
JMD-denominated bonds. The local capital market reacted with
confusion, owing to the recent JMD slippage, but their lack
of information about the failed JMD bonds, as well as a new
link between the GOJ and the Bank of Jamaica (BOJ) in the
form of Colin Bullock (former Governor of the BOJ, now
Financial Secretary in the Ministry of Finance (MOF)) may
explain this apparent idiosyncrasy. End summary.

--------------
Background
--------------


2. (U) The IMF held a press briefing on December 14 to
discuss the findings of its Article 4 consultations with GOJ
officials. Ratna Sahay, the Assistant Director of the
Western Hemisphere Department for the IMF, acknowledged that
the GOJ was likely to miss its target of a balanced budget.
She urged officials to continue to pursue this goal in the
last quarter of the Jamaican fiscal year, noting that the IMF
would be monitoring the country,s debt management strategy.
Sahay pointed out that debt levels in the region as a whole,
while improving relative to the recent past, remain high, and
under pressure from infrastructure demand and high petroleum
prices. This, in turn, was having an adverse effect on
Jamaica,s economic growth rate, which remains low despite
strong domestic and foreign private investment rates. With
little discretionary capital after debt servicing, public
sector investment suffers, creating a vicious circle.


3. (U) Sahay did praise Jamaican openness to investment,

citing a lack of constraints in terms of regulations and
bureaucratic procedures. She further noted that the country
has two strong preconditions for favorable growth: proximity
to the United States for the tourism and mining sectors in
particular, and strong democratic traditions that engender
investor confidence. Two obstacles outside of the fiscal
arena, however, remain: GOJ ability to respond to natural
disasters, and the escalating crime rate. If Jamaica
bolstered its disaster management capabilities, and brought
violent crime under control, the effects of sound fiscal
policy could reach their full potential.

--------------
A cautionary note(
--------------


4. (C) The GOJ,s budget woes, however, may be even worse
than they at first appear. On December 20, the GOJ announced
an unlimited USD-denominated bond offer at 8.125 percent on
the local capital market. The market here reacted with
incredulity, remarking that the GOJ was foolish to offer a
USD-denominated bond issue at a time of exchange-rate
instability. While it is no secret that poor revenue
performance this year has created the need to finance
expenditures through loan receipts (to the tune of some JMD
11 billion (USD 172 million)),what the capital markets do
not know is that on December 7 and December 14, the GOJ had
little success when it floated two local dollar-denominated
bonds. The first raised only JMD 800 million (USD 12.5
million),while the second raised JMD 600 million (USD 9.4
million). The GOJ, however, is not obligated by law to
divulge the results of these bond issues. Furthermore, two
other bonds were coming due in December. To avoid any panic
in the market, and to encourage those bondholders to roll
over, the GOJ said nothing. Instead, they merely announced
the USD bond offer.


5. (C) Courtney Williams (strictly protect),Senior Fiscal
Economist at the Ministry of Finance (MOF),told Post that
the MOF never intended to float a USD bond in December for
two reasons. First, the now-retired Financial Secretary,
Shirley Tyndale, had convinced the MOF that a balanced budget
was possible. Later in the year, when it became clear that
this was not a realistic goal, it was assumed that the
shortfall in revenues could be recouped with local-dollar
bond issuances. With new, confidential projections from the
GOJ that the fiscal deficit may be as large as 2 to 3 percent
of GDP ) a major deviation from the target - and after the
JMD bonds fell short, the MOF was faced with two unsavory
options: raise interest rates, or take a gamble on the
exchange rate by issuing a USD bond, for which market
appetite appears limitless.


6. (SBU) Institutional investors had been stockpiling cash
for most of the year, planning to buy end-of-year bond
issuances on the conventional wisdom that the BOJ would be
forced to raise interest rates in order to combat inflation,
which was considerably higher than expected. When this was
not the case, these investors were unwilling to bite on JMD
bonds at current rates of interest, under pressure as they
were from seasonal liquidity problems common during
Christmastime.

--------------
(but with a silver lining?
--------------


7. (C) While there is some cause for concern that the GOJ
will fall so far short of the balanced budget, there are also
positive indications. Williams noted that a contributing
factor to the BOJ decision not to raise interest rates, which
they have every right to do, was an improving realization on
the part of the BOJ that there is a balance between fiscal
and monetary policies that is best facilitated through close
cooperation. Williams is of the opinion that this new,
cooperative spirit is likely the result of the fact that
Colin Bullock replaced Shirley Tyndale as the Financial
Secretary at the MOF. Previously, Bullock had been on the

SIPDIS
Board of Governors of the BOJ, and is considered by many to
be a straight-talking technocrat, unlikely to make overstated
claims to satisfy political expediency.

--------------
Comment
--------------


8. (C) It comes as no surprise that the GOJ will fall short
of its target of a balanced budget, but the projected size of
the fiscal deficit (2 to 3 percent of GDP),is greater than
even the most pessimistic predictions. It is still possible
that revenue collections may improve in the last quarter of
the Jamaican fiscal year, but they will never surmount that
level. It is also possible that there will be a concerted
effort to improve tax compliance, especially in light of the
fact that Finance Minister Davies will be challenging for the
leadership of the People,s National Party over the coming
months. The new Director of Tax Administration, Vinnette
Keane, also has a reputation as a no-nonsense technocrat,
like Bullock, and will be unlikely to toe any party political
line in her drive to improve tax compliance.


9. (C) It is likely that Davies will lay the blame for the
failure to balance the budget squarely in the lap of external
shocks, most notably the weather and the high commodity
prices that have marked the year. It is also predicted that
liquidity will improve in January, as demands for funds fall
off after the holidays, and that the GOJ will be able to
return to successful issuance of JMD-denominated bonds to
finance end-of-year revenue shortfalls. Nevertheless, there
is likely to be some consternation in the capital markets if
the fiscal deficit is as bad as predicted. The appointments
of Colin Bullock and Vinnette Keene will hopefully bring
enough credibility and stability to fiscal policy to act as a
countervailing force. End comment.

JOHNSON