US embassy cable - 05KINGSTON832

UNCLAS SECTION 01 OF 03 KINGSTON 000832 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA/CAR/ (WBENT), WHA/EPSC (JSLATTERY) 
 
SANTO DOMINGO FOR FCS AND FAS 
 
TREASURY FOR L LAMONICA 
 
E.O. 12958:  NA 
TAGS: ECON, EFIN, JM 
SUBJECT: JAMAICA: A NATION SADDLED BY DEBT 
 
REF: 03 KINGSTON 3056 
 
1. (U)  Summary:  Despite GOJ efforts to lower its 
gargantuan public debt, Jamaica still has the unenviable 
record of being the second most indebted country in the 
world, after Lebanon, in terms of its debt-to-GDP ratio. 
At the end of 2004, Jamaica's stock of public debt stood 
at USD 12.5 billion or 142 percent of GDP.  Most of this 
debt is owed to private creditors and multilateral and 
bilateral agencies.  Increasing debt has been underpinned 
by higher borrowing to finance expenditures and the take- 
over of government guaranteed debt and could have been 
worse were it not for debt forgiveness.  Notwithstanding, 
the island maintains a well-established record of never 
defaulting on its debt.  Recognizing the gravity of the 
debt dynamics, the GOJ formulated a medium term debt 
management strategy in 1998.  While the sustainability, 
management and operation of the debt has improved since 
then, challenges still abound.  Debt servicing now 
accounts for over 70 percent of the budget, and the GOJ's 
goal of reducing the debt-to-GDP ratio to 100 percent of 
GDP by March 2006 appears optimistic.  End Summary. 
 
2. (SBU) Jamaica's rocky relationship with debt started 
during the oil crisis of the 1970s, but was aggravated by 
the financial sector crisis of the mid 1990s and the 
subsequent GOJ intervention.  The financial sector bail- 
out added over USD 1.7 billion to the debt stock in April 
2001.  By the end of 2004 the debt had jumped to USD 12.5 
billion or 142 percent of GDP, making Jamaica the second 
most indebted country in the world (in terms of the debt- 
to-GDP ratio) among countries assigned a "B" rating by 
international credit rating agencies, surpassed only by 
Lebanon.  Courtney Williams, Senior Fiscal Economist of 
the Ministry of Finance, told emboff on March 8 2005 that 
Jamaica is also by far the most heavily indebted country 
in the region.  The debt of the GOJ, at nearly five times 
revenues, is also one of the highest among B-rated 
countries.  Again only Lebanon is worse.  Jamaica's fiscal 
deficit of 5.5 percent in 2004/05, while better than most 
of its peers, places the country above the three percent 
or less benchmark target outlined by the Economic 
Commission for Latin America and the Caribbean (ECLAC) for 
countries with Jamaica's level of debt. 
 
3. (U) All is not lost, however, as the country's debt-to- 
GDP ratio has started to trend down from its recent peak 
of just over 150 percent of GDP.  Jamaica also runs 
massive primary surpluses (the difference between revenues 
and expenditures before debt servicing) to finance its 
high debt burden.  The primary surplus averages nearly 10 
percent of GDP, several times the ratio in most B-rated 
countries and about three times that of Brazil.  In 
addition, the country's external debt service-to-exports 
ratio averages around 15 percent, well below the 30 
percent benchmark.  Domestic interest rates are on the 
decline, the local currency has been stable, and the GOJ 
has the ability to raise revenues through increased 
citizen compliance with the tax code.  Jamaica also has a 
well-established record of never defaulting on debt. 
 
4. (U) Over USD 1.4 billion was added to the stock of 
public debt in 2004, a 13.5 percent increase over 2003. 
While this represents a slowdown in the rate of build-up, 
the situation would have been worse had it not been for a 
USD 16.4 million write-off from the British government, 
bringing to USD 65.6 million the amount written off under 
the Commonwealth Debt Initiative.  The Dutch Government 
also forgave USD 6.8 million, while the USG swapped USD 
6.5 million in exchange for investment in nature through 
the Tropical Forest Conservation Act (TFCA).  Williams 
told emboff that, while about USD 1 billion of the debt 
contracted in 2004 was sourced between April and December, 
only USD 506 million was for budgetary financing.  The 
remaining USD 477 million represented deferred financing 
(reftel) and brings into sharp focus the negative effects 
of this practice and, more importantly, government 
guarantees on loans to entities which, more times than 
not, have to be taken over by the GOJ and added to the 
debt stock. 
 
5. (U) In a clear break from trend, the external debt 
stock accounted for most of the increase in 2004, 
expanding by almost USD 1 billion or 22.1 percent.  Senior 
manager of the Ministry of Finance debt management team, 
Pamela McLaren, told emboff on March 9, 2005 that the 2004 
increase was an anomaly, since the GOJ actually sourced 
more loans from the external capital market than initially 
planned.  The more crippling domestic debt rose by USD 400 
million, or 7 percent, a marked slowdown in the growth 
rate (27.6 percent in last five years).  It is this 
overdependence on local debt, and the attendant problem of 
high interest rates, which prompted the GOJ to divert its 
attention to the external capital market.  This has been 
paying huge dividends as the GOJ's increased foreign 
borrowing resulted in a build up in the stock of Net 
Investment Revenue (NIR) (USD 1.9 billion at end 2004). 
Reduced reliance on domestic debt combined with a general 
improvement in the economy also allowed the Bank of 
Jamaica (BOJ) to reduce interest rates eleven times during 
2004, a situation Keith Collister of the Jamaica Chamber 
of Commerce said is bound to improve the debt dynamics in 
the future. 
 
6.  (U) The change in the composition of the public debt 
portfolio is a central tenet of the GOJ's 1998 medium-term 
debt management strategy.  The program was initially 
designed to return the debt to sustainable levels while 
ensuring that borrowing requirements are met at minimum 
cost.  While not nearly sufficient to eliminate the 
burden, the debt management program has succeeded in 
diversifying the debt portfolio, thereby reducing risk; 
facilitating Jamaica's increased access to the 
international capital markets; and maintaining a mix of 
fixed-rate and floating-rate debt to minimize interest 
rate risks.  The medium-term debt management program also 
succeeded in lengthening the maturity profile of the 
domestic debt, while diversifying the creditor and 
currency composition of the external debt.  When asked 
about the results of the program, McClaren stated that the 
ability to tap into the foreign market is one clear 
indication of its success.  She further stated that it is 
this higher external borrowing, which has allowed domestic 
rates to fall, thereby further improving local economic 
conditions. 
 
7. (U) Jamaica currently owes most of its local debt to 
financial institutions and its external debt to 
multilateral and private creditors.  Local Registered 
Stocks remain the most popular domestic debt instrument, 
accounting for 49.3 percent, while debentures are next in 
line with 27 percent.  The former are preferred for their 
longer maturity and competitive interest rates.  Jamaica 
increased its presence in the external debt market during 
the late 1990s and, by the end of 2004, the external debt 
had moved to USD 5.1 billion from USD 3.0 billion in 1999. 
Over the same period there has been an obvious shift in 
the debt composition, with the share of debt owed to 
private creditors moving from USD 730 million in 1999 to 
USD 2.4 billion in 2004.  At the same time, debt to 
multilateral and bilateral creditors has moved from USD 
2.9 billion to USD 2.7 billion.  Most of this decrease is 
attributed to the decline in debt to the International 
Monetary Fund (USD 1 million at end 2004) following the 
ending of borrowing relations in 1995. 
 
8. (U) While the ability to borrow debt from the foreign 
capital market reduces reliance on the local market and, 
by extension, eases interest rate pressures, it also 
carries pitfalls.  In particular, government is forced to 
pursue contractionary fiscal policies.  Indeed, the GOJ 
and, more importantly, Finance Minister Davies learned 
this lesson, as Jamaica had to avoid the capital market 
for almost a year following his disclosure of politically 
motivated fiscal indiscipline in 2002.  The shift to 
external borrowing also carries depreciation risks. 
Already, the GOJ is feeling the effects of having to find 
additional US dollars to finance its euro debt (21 percent 
of total external debt) since the euro started 
appreciating against the US dollar in 2004. 
 
9. (U) Increasing debt and debt servicing costs, which now 
account for over 70 percent of the budget, are not 
expected to go away any time soon, given that Parliament 
has passed a bill enabling the GOJ to borrow up to USD 
10.7 billion from the local market.  This decision has not 
gone down well with new leader of the Jamaica Labor Party 
Bruce Golding, who predicted that debt would reach JMD 1 
trillion (USD 16.4 billion) by 2006.  He told the Senate 
that excessive borrowing was imposing a mortgage on future 
generations.  The country could also face some turbulent 
times in the near future, as the GOJ has recently re-taken 
control of the beleaguered national airline.  The 
temporary management has already signaled its intention to 
raise capital for the troubled airline on a GOJ guarantee. 
The upward movement in US Treasury rates is also expected 
to up the rates at which Jamaica can contract new foreign 
debt.  Collister said he recognizes these challenges, but 
maintains that declining interest rates and the stable 
currency will stall the race to the JMD 1 trillion mark. 
 
10.  Comment:  While the rate of growth of the debt stock 
could slow in upcoming years, the country is expected to 
remain mired in debt for the foreseeable future.  This 
proposition makes the GOJ's target of a debt-to-GDP ratio 
of 100 percent by 2005/06 highly unlikely, unless the much 
heralded debt forgiveness plan being discussed by the UK's 
Tony Blair and Gordon Brown materializes.  The target 
becomes even less realistic when the liabilities of the 
embattled Air Jamaica, GOJ guarantees and deferred 
financing are taken into consideration.  Even the 
relatively optimistic Collister was quick to point out 
that, while things were improving, he found these issues 
troublesome.  This could also explain why one senior 
member of debt management team stated that the GOJ's 
position on debt concurred with the recommendations in the 
IMF report on Jamaica, but quickly pointed out that it did 
not represent his own views.  Without sustained economic 
growth, lower interest rates and exchange rate stability, 
combined with the will to make hard decisions, Jamaica 
will almost surely miss its 2006 debt target and possibly 
sink deeper into debt.  End Comment. 
 
TIGHE