Peter Phillips, Minister of Finance
BY KEITH COLLISTER Friday, July 31, 2015
LAST week Thursday, on July 23rd, Jamaica raised a mammoth US$2 billion on the international capital market through the issue of two new Eurobonds.
A recent Reuters article subsequently confirmed that three quarters of this sum, or US$1.5 billion, is to be used to purchase US$3.2 billion in debt owed to state-owned Venezuelan oil company Petroleos de Venezuela SA (PDVSA) by Jamaica’s PetroCaribe Development Fund (PDF), at 46 US cents on the dollar, or a discount of 54 per cent, with the remaining funds allocated for what the prospectus describes as general budgetary financing.
The money was raised by the Government of Jamaica, which then purchased the roughly US$3.2 billion owed to PDVSA by the PDF on a reduced value based on a present value calculation taking into account the time value of money, meaning that cash received now is worth more than cash received in the future.
This means that the ‘discount’ obtained already essentially captures the savings in interest costs from the low interest debt up front, which of course was the reason for the lower than face value purchase price.
Venezuelan loan rate
The PDVSA loans are for 25 years, with a two-year moratorium, and then principal and interest payments thereafter for the next 23 years. The interest rate is at 1.0 per cent with the proviso that when oil drops below US$40 per barrel it rises to 2.0 per cent.
However, the immediate gain in terms of additional debt to GDP reduction of 10 per cent of GDP up front is clear.
Just before the end of March, according to Ministry of Finance statistics, our public debt stock (Jamaican government definition) was 130.9 per cent as a percentage of GDP, but the overall debt stock as defined under the Extended Fund Facility (EFF) was significantly higher at 138.5 per cent. The latter “IMF” debt definition includes the PetroCaribe debt (and some other more minor debts), and is the key target defining the “economic reform programme”, particularly the primary surplus calculation.
The debt buyback is projected to reduce Jamaica’s debt-to-GDP ratio to below 125 per cent from the current roughly 137 per cent by the end of the next fiscal year in March, essentially accelerating the decline in the debt to GDP ratio to a level that while still high, would be regarded as more manageable by international investors.
By 2020, this PetroCaribe-driven fall in the debt to GDP ratio would still be roughly 5 per cent of GDP, and it will be a bit lower longer term.
However, sources advise that even in the long term, the debt reduction deal is net present value (NPV) positive, meaning that even after taking into account the time value of money the deal has reduced the debt to GDP ratio by a few percentage points on a NPV-adjusted GDP basis.
Obviously this calculation is sensitive to the assumptions used, and requires the loan portfolio to be modelled accurately.
However, while interest costs would certainly rise at the Central Government level initially from the issuance of the US$1.5 billion in new debt earmarked for the PetroCaribe buyback, the Central Government would now own the US$3.2 billion loan from PDVSA.
According to PricewaterhouseCoopers, of the J$256 billion balance sheet of the PetroCaribe Development Fund at March 2013, backing the PDVSA liabilities, virtually all of the assets were direct Government of Jamaica debt/loans or Government of Jamaica guaranteed debt.
Market players are aware that over the past two years, the PetroCaribe fund has been a heavy buyer of Jamaican government debt, particularly Eurobonds, adding to its already significant portfolio.
As a first step then, the Government can set off a portion of its newly acquired PetroCaribe loan with a similar amount of government debt held by the Petrocaribe fund, essentially extinguishing US$1.5 billion in debt by way of an accounting transaction.
At this point, just as if the Government of Trinidad had acquired the debt, the Government of Jamaica would still be owed US$1.7 billion by the PetroCaribe fund, which however still has assets of a similar amount to the US$1.7 billion in the form of mainly Jamaican government or government-guaranteed paper, and is therefore more than capable of servicing the principal and amortisation payment.
The fund would then continue as before, financing Jamaica’s oil purchases (which as long as Petrocaribe lasts actually increases the fund’s debt servicing capability, assuming it can find investments at above 1.0 interest). But importantly, the servicing of the remaining US$1.7 billion in debt the PDF now owes — goes to the Jamaican government rather than to PDVSA.
No direct impact on primary surplus
There is no direct impact on the primary surplus, as the primary surplus target does not include interest payments, and the buyback operation is a financing operation. As a ‘below the line’ transaction, it does not affect revenues or expenditures.
In short, there would be no need to raise taxes, or increase the primary surplus target, as if there were any additional interest or debt service costs from the transaction they would be fully financed.
Finally, it should be noted that the actual maturity of the debt has been pushed further out, as while the debt of the fund, as ultimately a government liability would have a remaining life of between 16 and 24 years, the true effective “duration” would be roughly half that due to the amortisation (repayment) of principal over the period.
So Jamaica borrowing by means of the 2028 and 2045 bond means that we have longer to pay the money back, and lower principal repayments in the short term.
The most positive effect should be on confidence, as the extra US$500 million raised for general budgetary financing means that — along with the IMF and other multilateral loans already programmed — Jamaica’s budget is now fully financed, and there is no risk of them repaying the roughly J$62 billion in February 2016, a lumpy payment part of the National Debt Exchange in 2013.
Now that the government no longer needs to go to the domestic capital market this year, and now has plenty of foreign exchange reserves, hopefully it will also have room to cut domestic interest rates to roughly 4.0 per cent, starting a virtuous circle of interest rate reduction, and allowing the private sector to tap what should become increasingly available lower cost financing.
All of this suggests that overall, the PetroCaribe deal was a good deal for Jamaica.
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