Jamaica’s borrowing costs are surging to the highest level in nine months after defaults by two Caribbean neighbors combine with the region’s slowest economic growth prospects to undermine investor confidence.
Yields on dollar bonds due in 2019 from the island nation, which restructured $7.8 billion of bonds almost three years ago, reached 8.31 percent on Oct. 31, the highest since February, and traded at 8.25 percent yesterday. Jamaican notes lost 0.9 percent in October, the worst performance among 15 Central American and Caribbean nations, according to JPMorgan Chase & Co. Bonds sold by Pakistan that carry the same B- rating from Standard & Poor’s returned 6.3 percent.
While Jamaican yields are below the 13 percent level reached before its 2010 restructuring, some investors are concerned that Prime Minister Portia Simpson Miller’s government will struggle with debt payments following Belize and Grenada’s defaults this year, said Stuart Culverhouse, the chief economist at Exotix Ltd. in London. Jamaica’s economy is forecast to expand 0.9 percent this year and 1.5 percent in 2017, the slowest pace in Latin America and the Caribbean, according to the International Monetary Fund. Central bank reserves fell by more than half since April 2011 to $1.1 billion in October.
“How much longer can Jamaica muddle through this with virtually no growth?” said Franco Uccelli, a senior economist for Central America and the Caribbean at JPMorgan in Miami. He said that while he doesn’t forecast a default, investors “are starting to wonder if after Belize, Jamaica could be next.”
The prime minister’s office directed questions to the Finance Ministry. Officials at the Finance Ministry didn’t respond to repeated phone messages and e-mailed requests for comment by Bloomberg News.
Expansion for the $14.5 billion economy is expected to remain weak as Simpson Miller vows to cut spending to lower debt and a global slowdown damps mining exports, Jamaica’s central bank said Aug. 24. That was before Hurricane Sandy caused at least 5 billion Jamaican dollars ($55 million) in damages last month before it headed to the U.S., though it largely spared resorts along the northern coast.
“Even before the hurricane we faced serious economic challenges,” Simpson Miller said Oct. 30. “This has been made worse by the passage of Hurricane Sandy.”
Bond investors are hesitant about the region as tourism- dependent economies are “one hurricane away from a plunge in GDP,” Marcela Meirelles, a Latin American strategist at TCW in Los Angeles, said in an interview.
Jamaica is one of at least five Caribbean island nations to restructure its debt since 2004. Grenada missed a Sept. 15 payment on $193 million of bonds before paying investors within a 30-day grace period. Belize is in talks with creditors who hold almost $300 million of bonds, its second restructuring in five years, after missing a $23 million payment in August and then paying half that amount a month later.
Jamaica swapped $7.8 billion of local bonds for securities with longer maturities and lower interest rates in 2010, when its debt burden exceeded 120 percent of gross domestic product. Debt surged to 140 percent of GDP in June after Jamaica failed to meet its budget targets, according to the IMF.
Remittances to Jamaica fell 2.6 percent to $170 million in August from a year earlier, the second monthly decline, according to the central bank. While tourism is likely to experience growth this year, the economy “remained flat” last quarter after contracting 0.1 percent in the first three months of 2012, the bank said in an Oct. 31 report. It blamed the decline on a disruption of mining operations and weak demand for aluminum.
Willingness to Pay
The government is “committed to a policy of fiscal prudence and debt sustainability over the medium-term,” central bank Governor Brian Wynter said in a Sept. 11 speech in Kingston. The bank said new taxes on goods and services such as phone calls will help reduce the budget deficit to 3.8 percent of GDP from 6.2 percent last year.
Concern that Jamaica will restructure its debt again are overblown, said Boris Segura, Latin America analyst at Nomura Holdings Inc.
“Jamaica has been the poster boy for imminent default for years now, but they don’t default,” Segura said in a phone interview. “The country has a weak ability to pay but strong willingness to pay.”
The spread between Jamaica’s 2019 bonds and 2018 notes sold by the Dominican Republic, the Caribbean’s largest economy, has increased to 4.42 percentage points, the widest since 2010, according to data compiled by Bloomberg. While both countries are seeking new accords with the IMF after failing to rein in spending, investors see Jamaica as the greater risk because of its high ratio of debt to GDP, said Culverhouse.
“What will matter in the near term is getting an IMF agreement sorted out and watching fiscal performance,” Culverhouse, who has a “hold” rating on Jamaican bonds, said in a phone interview. “If performance starts to wane, the room for maneuver is pretty limited and that might raise more concerns.”
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