Jamaica’s Jumbled Repo Repair
Jamaican stocks were down 5 percent on the MSCI Frontier index through Q3 after a sovereign bond return and mixed IMF program exam which stressed the repo overhang “freezing” fixed income. GDP growth has been cramped by drought but should reach 1 percent in the current fiscal year on near double-digit inflation due to food prices and currency depreciation of 10 percent against the US dollar. Unemployment is almost 15 percent and business confidence is off but increased tourism and opening of a new highway were bright spots. The July $800 million international issue was the biggest to date at a 7.5 percent yield and will refinance upcoming payments as reserves also aided by remittances topped $2 billion. The central bank has injected liquidity to cut overnight rates to 3 percent, but annual private sector credit extension is still sluggish at 5 percent and concentrates on short-term consumer borrowing. Bank NPLs are at 5 percent but government bond risk lingers after the local exchange last year to qualify for Fund assistance with the secondary market “inactive.” Both internal and external funding are precarious, as budget discipline depends on further wage reduction and oil import costs would spike with the cutoff of Venezuela’s concessional facilities. Domestic debt revival will entail an upward yield curve shift generating bank and securities firm losses and new financial services oversight legislation will be tested, the review warns. The 7.5 percent of GDP primary budget surplus is on target for now but state enterprise support must be cut further as in the 45 percent stake in the bauxite joint venture with Alcoa. Public debt is at 140 percent of GDP and asset sales should be accelerated to meet the 100 percent end-decade goal. Securities dealer stress-testing is scheduled as a post-crisis retail repo framework is prepared but emergency backstops may be needed for the transition. Exchange rate adjustment has been helpful but business and labor competitiveness can be improved through more flexibility and automation. Infrastructure should benefit from passage of a proposed power law that facilitates plant launch, the Fund believes.
The global bond reception reflects solid Latin America and Caribbean capital inflows according to the IIF’s October survey, which estimated 2014 debt and equity allocation at $150 billion and the overall thirty emerging economy private total including FDI at almost $1.2 trillion, over half into Asia and China in particular. Europe will suffer a 60 percent drop with Russia’s sanctions-driven “collapse” as Middle East-Africa interest is steady with a tentative uptick in Egypt, the organization notes. Industrial world monetary policy will see offsetting tendencies from the US and Europe/Japan keeping the low interest “push” intact while the pull is dented by lower GDP growth around 4 percent and flat to negative company earnings. However single-digit valuations for major markets may be compelling as BRIC correlation in mutual funds fades to usher in a potentially messy rebuilding phase with more “downside risk” the outlook cautions.
