The Caribbean’s Dastardly Debt Do-Overs

Jamaica, which was the only MSCI frontier stock market down in January, was further maligned with a sovereign rating default designation as Prime Minister Simpson proposed a second local debt exchange to restart an IMF standby arrangement after the 2010 $8 billion lower-interest longer maturity operation accepted by banks and securities dealers. She cited a “dismal future” with 55 cents of every budget dollar earmarked for service at the current 140 percent debt/GDP ratio. The Finance Minister repeated the previous line of no principal haircut although net present value terms classify the deal as distressed as benchmark yields neared double-digits. The domestic dollar lost 5 percent against the greenback in the last quarter as recession continued and less than 1 percent growth is expected this year at the bottom of regional ranks. External bond spreads are at 625 basis points over Treasuries on the assumption they will again be spared from restructuring although internal foreign-currency instruments are included. Foreign reserves fell 40 percent in 2012 to just over $1 billion or four months’ imports as remittances barely budged. The fiscal deficit exceeded the 5 percent of GDP target and the current account gap is double that measure on inflation in the 6-8 percent range. A tax package introduced in parliament, which the opposition described as “massive and iniquitous” will raise costs as the public sector will face wage and payroll cuts in an effort to bring the debt-output number below 100 percent by end-decade. The repeat swap follows the recent completion of Belize’s super bond write-down, as the basic coupon was slashed to 5 percent and the “step-up” to 6.75 percent from 8.5 percent after the government originally presented a demand for 75 percent reduction that was met with hedge fund outrage. Officials calculate $250 million in savings over the next decade, and secondary prices rose to 60 cents on the agreement. An immediate coupon payment is due as GDP growth is estimated at 3-4 percent on good North American tourist volume despite a murder saga implicating a US expatriate computer tycoon. FDI covers the current account deficit and the budget hole is small by sub-regional comparison as investment houses again recommended a “market-weight” position for the high-yield issue.

Neighboring Costa Rica in contrast has received heavy allocation from abroad prompting the imposition of capital curbs to stem currency appreciation as it prepares another $1 billion external bond placement. The economy will again expand 4 percent on both manufacturing and services pillars on inflation projected around the same level. Major tax reform is on hold with general elections a year away and public debt may soon touch 50 percent of GDP. Foreign firms repatriating profits have caused modest current account deterioration, but nature tourism remains a big offsetting draw for return vacations.