JAMAICA: A NATION SADDLED BY DEBT

UNCLAS SECTION 01 OF 03 KINGSTON 000832

SIPDIS

SENSITIVE

STATE FOR WHA/CAR/ (WBENT),WHA/EPSC (JSLATTERY)

SANTO DOMINGO FOR FCS AND FAS

TREASURY FOR L LAMONICA

E.O. 12958: NA
TAGS: ECON EFIN JM
SUBJECT: JAMAICA: A NATION SADDLED BY DEBT

REF: 03 KINGSTON 3056


1. (U) Summary: Despite GOJ efforts to lower its
gargantuan public debt, Jamaica still has the unenviable
record of being the second most indebted country in the
world, after Lebanon, in terms of its debt-to-GDP ratio.
At the end of 2004, Jamaica's stock of public debt stood
at USD 12.5 billion or 142 percent of GDP. Most of this
debt is owed to private creditors and multilateral and
bilateral agencies. Increasing debt has been underpinned
by higher borrowing to finance expenditures and the take-
over of government guaranteed debt and could have been
worse were it not for debt forgiveness. Notwithstanding,
the island maintains a well-established record of never
defaulting on its debt. Recognizing the gravity of the
debt dynamics, the GOJ formulated a medium term debt
management strategy in 1998. While the sustainability,
management and operation of the debt has improved since
then, challenges still abound. Debt servicing now
accounts for over 70 percent of the budget, and the GOJ's
goal of reducing the debt-to-GDP ratio to 100 percent of
GDP by March 2006 appears optimistic. End Summary.


2. (SBU) Jamaica's rocky relationship with debt started
during the oil crisis of the 1970s, but was aggravated by
the financial sector crisis of the mid 1990s and the
subsequent GOJ intervention. The financial sector bail-
out added over USD 1.7 billion to the debt stock in April

2001. By the end of 2004 the debt had jumped to USD 12.5
billion or 142 percent of GDP, making Jamaica the second
most indebted country in the world (in terms of the debt-
to-GDP ratio) among countries assigned a "B" rating by
international credit rating agencies, surpassed only by
Lebanon. Courtney Williams, Senior Fiscal Economist of
the Ministry of Finance, told emboff on March 8 2005 that
Jamaica is also by far the most heavily indebted country
in the region. The debt of the GOJ, at nearly five times
revenues, is also one of the highest among B-rated
countries. Again only Lebanon is worse. Jamaica's fiscal
deficit of 5.5 percent in 2004/05, while better than most
of its peers, places the country above the three percent
or less benchmark target outlined by the Economic
Commission for Latin America and the Caribbean (ECLAC) for
countries with Jamaica's level of debt.


3. (U) All is not lost, however, as the country's debt-to-
GDP ratio has started to trend down from its recent peak
of just over 150 percent of GDP. Jamaica also runs
massive primary surpluses (the difference between revenues
and expenditures before debt servicing) to finance its
high debt burden. The primary surplus averages nearly 10
percent of GDP, several times the ratio in most B-rated
countries and about three times that of Brazil. In
addition, the country's external debt service-to-exports
ratio averages around 15 percent, well below the 30
percent benchmark. Domestic interest rates are on the
decline, the local currency has been stable, and the GOJ
has the ability to raise revenues through increased
citizen compliance with the tax code. Jamaica also has a
well-established record of never defaulting on debt.


4. (U) Over USD 1.4 billion was added to the stock of
public debt in 2004, a 13.5 percent increase over 2003.
While this represents a slowdown in the rate of build-up,
the situation would have been worse had it not been for a
USD 16.4 million write-off from the British government,
bringing to USD 65.6 million the amount written off under
the Commonwealth Debt Initiative. The Dutch Government
also forgave USD 6.8 million, while the USG swapped USD
6.5 million in exchange for investment in nature through
the Tropical Forest Conservation Act (TFCA). Williams
told emboff that, while about USD 1 billion of the debt
contracted in 2004 was sourced between April and December,
only USD 506 million was for budgetary financing. The
remaining USD 477 million represented deferred financing
(reftel) and brings into sharp focus the negative effects
of this practice and, more importantly, government
guarantees on loans to entities which, more times than
not, have to be taken over by the GOJ and added to the
debt stock.


5. (U) In a clear break from trend, the external debt
stock accounted for most of the increase in 2004,
expanding by almost USD 1 billion or 22.1 percent. Senior
manager of the Ministry of Finance debt management team,
Pamela McLaren, told emboff on March 9, 2005 that the 2004
increase was an anomaly, since the GOJ actually sourced
more loans from the external capital market than initially
planned. The more crippling domestic debt rose by USD 400
million, or 7 percent, a marked slowdown in the growth
rate (27.6 percent in last five years). It is this
overdependence on local debt, and the attendant problem of
high interest rates, which prompted the GOJ to divert its
attention to the external capital market. This has been
paying huge dividends as the GOJ's increased foreign
borrowing resulted in a build up in the stock of Net
Investment Revenue (NIR) (USD 1.9 billion at end 2004).
Reduced reliance on domestic debt combined with a general
improvement in the economy also allowed the Bank of
Jamaica (BOJ) to reduce interest rates eleven times during
2004, a situation Keith Collister of the Jamaica Chamber
of Commerce said is bound to improve the debt dynamics in
the future.


6. (U) The change in the composition of the public debt
portfolio is a central tenet of the GOJ's 1998 medium-term
debt management strategy. The program was initially
designed to return the debt to sustainable levels while
ensuring that borrowing requirements are met at minimum
cost. While not nearly sufficient to eliminate the
burden, the debt management program has succeeded in
diversifying the debt portfolio, thereby reducing risk;
facilitating Jamaica's increased access to the
international capital markets; and maintaining a mix of
fixed-rate and floating-rate debt to minimize interest
rate risks. The medium-term debt management program also
succeeded in lengthening the maturity profile of the
domestic debt, while diversifying the creditor and
currency composition of the external debt. When asked
about the results of the program, McClaren stated that the
ability to tap into the foreign market is one clear
indication of its success. She further stated that it is
this higher external borrowing, which has allowed domestic
rates to fall, thereby further improving local economic
conditions.


7. (U) Jamaica currently owes most of its local debt to
financial institutions and its external debt to
multilateral and private creditors. Local Registered
Stocks remain the most popular domestic debt instrument,
accounting for 49.3 percent, while debentures are next in
line with 27 percent. The former are preferred for their
longer maturity and competitive interest rates. Jamaica
increased its presence in the external debt market during
the late 1990s and, by the end of 2004, the external debt
had moved to USD 5.1 billion from USD 3.0 billion in 1999.
Over the same period there has been an obvious shift in
the debt composition, with the share of debt owed to
private creditors moving from USD 730 million in 1999 to
USD 2.4 billion in 2004. At the same time, debt to
multilateral and bilateral creditors has moved from USD
2.9 billion to USD 2.7 billion. Most of this decrease is
attributed to the decline in debt to the International
Monetary Fund (USD 1 million at end 2004) following the
ending of borrowing relations in 1995.


8. (U) While the ability to borrow debt from the foreign
capital market reduces reliance on the local market and,
by extension, eases interest rate pressures, it also
carries pitfalls. In particular, government is forced to
pursue contractionary fiscal policies. Indeed, the GOJ
and, more importantly, Finance Minister Davies learned
this lesson, as Jamaica had to avoid the capital market
for almost a year following his disclosure of politically
motivated fiscal indiscipline in 2002. The shift to
external borrowing also carries depreciation risks.
Already, the GOJ is feeling the effects of having to find
additional US dollars to finance its euro debt (21 percent
of total external debt) since the euro started
appreciating against the US dollar in 2004.


9. (U) Increasing debt and debt servicing costs, which now
account for over 70 percent of the budget, are not
expected to go away any time soon, given that Parliament
has passed a bill enabling the GOJ to borrow up to USD
10.7 billion from the local market. This decision has not
gone down well with new leader of the Jamaica Labor Party
Bruce Golding, who predicted that debt would reach JMD 1
trillion (USD 16.4 billion) by 2006. He told the Senate
that excessive borrowing was imposing a mortgage on future
generations. The country could also face some turbulent
times in the near future, as the GOJ has recently re-taken
control of the beleaguered national airline. The
temporary management has already signaled its intention to
raise capital for the troubled airline on a GOJ guarantee.
The upward movement in US Treasury rates is also expected
to up the rates at which Jamaica can contract new foreign
debt. Collister said he recognizes these challenges, but
maintains that declining interest rates and the stable
currency will stall the race to the JMD 1 trillion mark.


10. Comment: While the rate of growth of the debt stock
could slow in upcoming years, the country is expected to
remain mired in debt for the foreseeable future. This
proposition makes the GOJ's target of a debt-to-GDP ratio
of 100 percent by 2005/06 highly unlikely, unless the much
heralded debt forgiveness plan being discussed by the UK's
Tony Blair and Gordon Brown materializes. The target
becomes even less realistic when the liabilities of the
embattled Air Jamaica, GOJ guarantees and deferred
financing are taken into consideration. Even the
relatively optimistic Collister was quick to point out
that, while things were improving, he found these issues
troublesome. This could also explain why one senior
member of debt management team stated that the GOJ's
position on debt concurred with the recommendations in the
IMF report on Jamaica, but quickly pointed out that it did
not represent his own views. Without sustained economic
growth, lower interest rates and exchange rate stability,
combined with the will to make hard decisions, Jamaica
will almost surely miss its 2006 debt target and possibly
sink deeper into debt. End Comment.

TIGHE