Benefits to JMD global bond being in local currency, says Sterling

The Jamaican government’s $46.6 billion bond issued internationally but linked to the Jamaican dollar forms part of a strategy to convert more of the country’s debt to local currency.

It’s the first global bond to be linked to the JMD, the Ministry of Finance said in a statement. Servicing of the debt and principal payments will be linked to the value of the Jamaican dollar.

It is always better to borrow in the currency that you earn or print, said Marian Ross-Ammar, vice president of trading and investment at Sterling Asset Management in a Financial Gleaner interview. “It is generally a safer option.”

“This is true whether you are an employee, corporate or government. You are taking on less currency risk when you borrow in local currency,” said Ross-Ammar.

The bond, which raised the equivalent of about US$300 million, will mature in 2030.The take-up of the offer came mainly from foreign investors, who consumed 93.5 per cent of the debt issue. The other 6.5 per cent were from local investors.

Under the new offer, the Government swapped out expensive debt denominated in foreign currency for cheaper debt in local currency, in line with its stated goal of “de-dollarising” the country’s debt stock.

The new bond carries a coupon rate of 9.625 per cent, a higher rate than the old bonds replaced, which were priced at 6.75 per cent, 7.625 per cent and 9.25 per cent. But it could end up being cheaper to service given annual declines in the JMD’s currency value against the US dollar.

It’s not the only determinant, however. So whether Jamaica ends up with a bargain over the seven-year horizon remains to be seen.

“Whether or not the note is cheaper in the long run will depend on the inflation differentials between Jamaica and the US and the resulting currency movement,” said Ross-Ammar, explaining that if the Jamaican dollar depreciates over the tenor of the bond, then the bond will become cheaper in real terms.

“Inflation in Jamaica is generally and has historically been higher than that in the US. In a free market, this would cause the Jamaican dollar to depreciate against the US dollar, thus making the debt cheaper over time,” she added.

Over the past decade, the Jamaican dollar has lost roughly five per cent of value annually against the USD. Year to date, it has depreciated by 3.2 per cent and is trading at around $156 to $157 against the greenback.

Jamaica’s total debt stock stands at $2.15 trillion or about US$13.8 billion.

Last month, the Jamaican government, through its global coordinators Citigroup, allowed holders in the three bonds valuing US$1.76 billion to tender their notes for cash. However, investors largely thumbed their noses at the offer. The surrendered bonds amounted to US$262 million, which was only 15 per cent of the outstanding pool.

steven.jackson@gleanerjm.com