Jamaica
News - Real Estate - Economy (July 16, 2004)
Fiscal confidence continues Investors show healthy appetite for new Eurobond
IT SEEMED that international
institutional emerging market investors just couldn't get enough of Jamaica's
sovereign debt. Deutsche Bank and Commerzbank, both of Germany, were the lead
brokers of the bond, paying 11 per cent and maturing in 2012.
On July 15, the Government's Eurobond took the
international investing market by storm as the original offer of EURO100 million
was increased by 100 per cent to EURO200 million. The success of the Eurobond is
in part a result of Dr. Omar Davies, Minister of Finance & Planning June
meeting with European investors to give them a report on the Jamaican economy.
According to Mr. Keith Collister, business
development manager at First Global Stockbrokers, "We believe the news that
the Jamaican Government has raised Euro 200 million was the last piece in the
puzzle of the restoration of confidence in our local asset market. This issue
has occurred after an improvement in the environment and follows on from the
over US$100 million raised in the domestic market last week."
To bolster his European sales pitch, Minister
Davies stated that the economy is improving in the following ways:
Economic growth will be 2.5 per cent in 2004
versus 2.1 per cent in 2003.
Debt will fall from 140 per cent of Gross
Domestic Product (GDP) to 135 per cent of GDP by 2005.
Tourism revenues increased by 18 per cent year
over year.
The country's foreign-exchange reserves rose
to US$1.7 billion in May, up from US$1.2 billion in December 2003.
Experts have been weighing in on the implications
of the Government's success on the economy.
EFFECT ON THE FOREIGN EXCHANGE MARKET
Mr. Collister states, "The current issue is likely to push Jamaica's Net
International Reserves (NIR) to near record levels of US$1.9 billion, and should
create sufficient confidence in the foreign exchange market."
Orville Johnson, chairman of Today's Money,
agrees that this new Eurobond will positively impact the market. "With the
kind of NIR the Bank of Jamaica (BoJ) is building, it now means that any
movement in the foreign exchange market will not be at a level that they cannot
defend.
"With the present situation, that sees
the fiscal numbers in good shape, there is no push on the foreign exchange
market." But, at least two players do not see the foreign exchange market
being so rosy. A leading young treasury manager, speaking on the condition of
anonymity, said, "It doesn't matter what the level of the NIR is. When the
BoJ sells United States dollars, they sell it to end-users businesses that
use hard currency for export or import purposes. The brokers are just
intermediaries. So when the BoJ comes in now, it is not making much effect in
market. Even with the good news of the bond issue, it didn't have much effect on
the market.
"The Jamaican dollar still depreciated. As
long as there are attractive foreign exchange investment instruments, whether in
U.S. dollars or Euros (brokers use U.S. dollars to buy Euros overseas in large
blocks) the BoJ cannot satisfy their demand. For a month and a half, this has
been the case.
"The end users don't have much use for
the funds, it is the brokers. And note, the tourist season is over, so the big
boom of foreign exchange coming in is over. I say the Jamaican dollar will
continue to depreciate."
And we mustn't forget where the bolster of the
NIR is coming from. States Christopher Chin Loy, investment manager at Mayberry
Investments, "The NIR is only stronger on a debt basis. It is not free
money, and we must remember that. And it is not cheap money. It will pay bond
holders very well, but put the Government under pressure to repay them in hard
currency at double digits interest rates."
CAN DEBT LEVELS FALL?
Mr. Johnson believes that the focus of the Government is debt containment.
"The policy of the Government has been to raise enough hard currency to
cover external obligations without having to rely on the local market. Minister
Davies has stated that the objective is to match assets and liabilities."
Mr. Collister states, "The Government has
paid down the Euro 175 million bond maturing in August which should be very
positive for our financial markets in general. This external funding
vulnerability has been a key concern of overseas investors.
"In essence, when the Government has to
borrow in Jamaica to honour its overseas debt, local investors demand a premium
for their money which triggers interest rate hikes." Mr. Johnson concurs,
"The Government does not want to put pressure on domestic interest
rates."
WILL INTEREST RATES GO UP OR DOWN?
And the uppermost question in the minds of many is the direction of interest
rates. Will they go up, down or remain at present levels? Mr. Collister
believes, "The Euro bond could allow a renewed cycle of interest rate cuts
by the BoJ."
Mr. Johnson believes, "Potentially,
interest rates could go down. However, I think that they will level off for some
time, but definitely, they will not go up. If rates do go down, it will be
slowly."
The treasury manager is a bit more sceptical.
"If the Government continues to issue debt instruments in U.S. or Euro
currency in the double digits, I can't see how Jamaican interest rates can go
down much lower. There is a resistance level at 17 per cent. When the Government
tried to raise money at 15 per cent, people ignored them. You have to give me a
premium interest rate to beat inflation and devaluation. Personally, I believe
it would take a miracle to ever see interest rates in the single digits."
OPPORTUNITY KNOCKS
If the Government can overcome investor resistance to lower interest rates, one
big beneficiary of this movement would be the Jamaica Stock Exchange (JSE).
Considered one of the major alternatives to putting funds in the money market or
real estate, investors could turn to the JSE for greater returns. Leo Williams,
managing director of JMMB Securities states, "If interest rates go down, we
could see another rally in the stock market."
But just don't look for a major rally. The
treasury manager states, "The JSE is an alternative for investors if rates
do down, but it can take only so much money and no more." Yet, like a
vicious cycle, if interest rates go down, it would put pressure on the foreign
exchange market. States Mr. Chin Loy, "If you drop rates, where is the
money going go to? People are not going to accept rates of return below
inflation, and not everybody is going to invest in the stock market. Many people
will say it is better to hold hard currency instruments where you get interest
in hard currency."
A RAY OF HOPE
However, the experts say that things are looking up. States Mr. Chin Loy,
"We are riding a euphoric high on the economy. I say euphoric because I
don't think we have all our ducks lined up in a row. But things are going
well." Mr. Johnson concurs, "Right now, there is a certain level of
investor confidence. The big challenge is to keep the fiscal numbers under
control."
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