UBS tells investors to avoid Jamaican debt

Swiss financial services company UBS has recommended that investors stay away from Government of Jamaica debt due to uncertainty about the newly elected government and the country's relationship with the International Monetary Fund (IMF).

"We think the tight fiscal conditions and the renegotiation of the IMF programme increases uncertainty too much," the company said in its UBS Investment Research: Latin America Brief on December 30, a day after landslide elections here marking a change of administrations.

"Yields should climb but we would recommend staying away for now until we get a better idea of the IMF degree of flexibility", UBS said.

The new administration hopes to negotiate a different borrowing arrangement with the IMF. A team from the IMF will visit Jamaica next week to meet with the new Minister of Finance Dr Peter Phillips, who wants to replace the current standby agreement (SBA) with a more flexible Extended Fund Facility.

Phillips has said he will not change the economic team he inherited.

UBS said the only positive it sees from the election results of 42-21 seats in favour of the PNP is that the Simpson Miller administration had gained a solid majority in Parliament, which should allow them to pass and implement reforms and policies with "expediency".

Phillips has said he will not cut the public sector but will seek to control the wage bill through deals with the trade unions.

Prime Minister Portia Simpson Miller has labelled the US$1.27-billion IMF deal as being "too stringent" and "demanding excessive austerity in front of domestic and international conditions".

UBS said, however, that "despite recent slippage", the agreement and the multilateral loans it unlocked have been playing a significant role in keeping Jamaica's fiscal financing and credibility afloat.

"The problem is that Jamaica's fiscal accounts have no room to accommodate job creation," the investment bank said, citing a fiscal deficit of about five per cent of GDP and debt charges that consume over 40 per cent of revenues.

"Financial assistance from multilaterals was there to support public finances, but a renegotiation with the IMF should put this on hold. Time will be too short because the underlying fiscal position has grown weaker due to a slow recovery in revenue and the authorities' inability to rein in primary spending as needed," said the global financial services company, which is operational in more than 40 countries.

"This will be exacerbated by continued stagnant GDP growth and high unemployment which will be further squeezed by the uncertainty brought by the regime change and external risk, particularly the faltering US recovery, which could reduce tourist arrivals and export demand."

The Swiss company, meantime, predicts that the IMF will "bend little" and attempt to hold Jamaica to the Fiscal Responsibility Framework agreed under the SBA to lower the debt to GDP ratio.

The debt targets "will require significant and sustained fiscal effort through tough tax increases, expenditure control, including unpopular cuts in public employment, as well as divesting loss-making state companies," UBS said.

business@gleanerjm.com