JAMAICA: IMF STANDBY FACILITY APPROVED

UNCLAS KINGSTON 000194

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV PREL PINR SOCI EAIR IDB IBRD IMF JM
XL
SUBJECT: JAMAICA: IMF STANDBY FACILITY APPROVED

REF: KINGSTON 90 (251842Z JAN 10)(NOTAL)
09 KINGSTON 1188 (301331Z DEC 09)(NOTAL)

Summary




1. (SBU) After a series of missed deadlines, the Government of
Jamaica (GOJ) finally has secured a deal with the International
Monetary Fund (IMF). On February 4, the IMF approved a USD 1.27
billion Standby facility for Jamaica, opening the door for a
further USD 1 billion in funding from other multilateral
institutions. This is the first bit of positive news for the
embattled Jamaica Labour Party (JLP)-led government and should lead
to a recovery in confidence, especially as ratings agencies are
expected to upgrade the country's credit ratings once the Jamaica
Debt Exchange (JDX) is executed on February 16 (Reftel A).
However, the extent of the recovery will depend on the GOJ's
ability to control the fiscal deficit, which continues to spiral
out of control due to declining revenues. End summary.



IMF Approves Standby Agreement




2. (SBU) After almost a year of intense negotiations, on February 4
the IMF finally approved Jamaica's request for a 27 month USD 1.27
billion Standby facility. The agreement immediately opens the door
for the GOJ to draw down USD 650 million or just over 50 percent of
the total loan amount. The remainder of the funds will be
disbursed in quarterly tranches providing the GOJ achieves the
targets, including a number of legislations and the sale of a
number of loss making entities, outlined in the letter of intent.
Most notable, is the sale of Air Jamaica to Caribbean Airlines
(Reftel B).



Triggers Additional Funding




3. (SBU) The IMF approval will pave the way for the GOJ to access
at least another USD 1.1 billion in funding from the other
multilateral institutions over the same 27 month period. Of this
amount, the Inter-American Development Bank will provide USD 600
million, the World Bank USD 400 million and the Caribbean
Development Bank USD 50 million. Almost USD 700 million of this
amount will be disbursed immediately. The European Union, which
publicly congratulated the GOJ following the announcement
yesterday, is also expected to provide grant funding for fiscal
support.



JDX Progresses




4. (SBU) The IMF deal also came on the back of news that the JDX
had garnered almost 97 percent support up to February 4. The
offer, which had been set to close on January 26, has been extended
to February 23 to accommodate retail bondholders. However, the GOJ
has made clear that late applicants will not receive any material
benefit. The JDX swaps JMD 701 billion in domestic debt at rates
of up to 28 percent for bonds averaging 12.25 percent at extended
maturities. The exchange is expected to save the government JMD 40
billion, or almost 3 percent of GDP each year, and to reduce by up
to 65 percent the amount of debt maturing in the next three years.




Comment




5. (SBU) The long awaited IMF approval is the first piece of
positive news received by the embattled GOJ in over a year.
However, Minister of Finance Audley Shaw has suggested the IMF deal
is the first element of a long process, which should culminate in
the complete restructuring of the economy. He noted that the JDX
in particular is a game changing opportunity given the expected

decline in interest rates, which should divert credit from the GOJ
to the private sector. And the exchange already has led to a
decline in Treasury Bill rates, which dipped by 430 basis points to
12.5 percent, prompting some banks to reduce loan rates to 17
percent. The ratings agencies also have signaled their intention
to upgrade the country's credit ratings to investment grade once
the JDX is executed on February 16. However, the economic recovery
will depend on the GOJ's ability to arrest the fiscal deficit,
which has spiraled to almost 13 percent of GDP on the back of
falling revenues. End comment.
Parnell