Examining past IMF relationships as Jamaica's deal nears
SSL in the Money
Shari DaCosta
Wednesday, February 03, 2010
THE International Monetary Fund's (IMF) Executive Board is scheduled to meet tomorrow to make a final decision on the US$1.25-billion Stand-By Arrangement (SBA) being sought by the Government of Jamaica (GOJ).
While there are clearly numerous factors contributing to the performance of economies internationally, some of the restructuring and targets, either required or supported by multilateral institutions, including the IMF, helped to bring forth improvements.
Peru, which has had four SBAs with the IMF since 2000 (in 2001, 2002, 2004, 2007), has faced high levels of poverty and unemployment, periods of weak economic growth, dollarisation risks and a rising fiscal deficit. The country's most recent SBA with the IMF was for US$257.7 million on January 26, 2007.
During the past ten years, however, the Peruvian government has implemented policies with the aim of fostering lasting growth, low inflation, an improved public debt structure and a robust financial system. Like Jamaica, Peru has undergone fiscal reforms including government spending cuts and shifts, as well as, tax redistribution, which involved broadening the tax base and concentrated effort by the local authorities to crack down on tax evasion.
There has also been a clear movement towards free trade, reflected through a reduction in average import-trade tariffs to 8.3 per cent effective January 1, 2007 (from 10.1 per cent previously), more internationally-competitive pricing at the state-owned oil Company and the pursuit of bilateral trade agreements.
The Government's policies over the last decade have shown a great deal of success. Poverty has decreased steadily since 2004, when half of the country's total population was below the poverty line. In fact, poverty in Peru decreased 5.2 per cent in 2007 alone to 39.3 per cent. Undoubtedly, accelerated economic growth and the bolstering of social programmes contributed to advancements in Peruvian standard of living. Jamaica should also be able to see improvements in this regard, with the prospect of higher growth and the proposed expansion of the Programme of Advancement Through Health and Education (PATH).
Looking at Peru's financial sector, credit markets have been expanding since 2004, with domestic currency loans rising faster than foreign currency loans, reflecting a renewed confidence in the domestic currency. In 2009, 40 per cent of Peru's public debt was denominated in the local currency, the Sol, versus nearly all debt being held in US dollars at the beginning of the decade.
Peru's debt to GDP ratio declined to 25 per cent last year compared with approximately 50 per cent in the early 2000s. In Jamaica, the measure is estimated at 137 per cent of GDP for the current fiscal year and is expected to be reduced over the medium-term thanks to recent and ongoing efforts, including the Jamaica Debt Exchange (JDX).
Shortly after the IMF funds were approved in 2007, the price of Peru's 8.6 per cent 2017 bond climbed to US$122.17 by May 31, 2007 from its January 26, 2007 price of US$116.95. The country's low rates of inflation and strengthening macroeconomic fundamentals prompted Standard & Poor's and Fitch Ratings to upgrade the country's sovereign debt rating in 2008 to investment grade, with a stable outlook. In Jamaica's case, although the country's local currency sovereign credit ratings were recently reduced by Standard & Poor's (to "SD") and Fitch Ratings (to "C" from "CCC"), both agencies said that they will likely revise Jamaica's ratings upwards after the successful completion of the JDX. And since the announcement of the JDX on January 13, 2010, the price of the GOJ 2017 global bond has increased by US$6.00 (6.25 per cent) to US$102.00 (February 2, 2010).
Uruguay, also signed SBAs with the IMF in 2000 and 2005, with the latter involving the approval of a US$1.3 billion SBA with the purpose of "supporting the country's economic stabilisation through mid-2008 and helping to foster sustainable growth while reducing vulnerabilities related to high public debt".
Like Jamaica and Peru, with the onset of the IMF deal, the Government passed tax reforms and began reining in public spending. According to the IMF, other efforts supported by the fund and other multilateral institutions included a successful debt exchange (April 2003), developing capital markets, opening up sectors that were once restricted to the state to private sector participation and competition, strengthening property and creditor rights, enhancing infrastructure, and bolstering Uruguay's investment environment.
Uruguay was able to exit its agreement with the IMF early due to a better-than-expected rebound in its economic growth, as well as, expansion in its credit markets, which was funded mainly through increasing deposits. Although dollarisation remains an issue in the country with US dollar denominated loans accounting for 58 per cent of credit in 2008, this is an improvement from the 65 per cent it stood at in 2000. Furthermore, the country's banking system is significantly better capitalised and firmer regulations have been put in place to manage risks associated with dollarisation. Government debt held in foreign currency fell to 67 per cent in 2008, from 94 per cent in 2003.
Standard & Poor's took notice of the headway being made in the Uruguayan economy, and on July 22, 2008, boosted its sovereign credit rating for Uruguay to "BB-" from "B+", citing the country's economic growth and reductions in international debt. The outlook for Uruguay remains strong, with the IMF predicting growth of 3.5 per cent this year.
All signs suggest that Jamaica is positioning itself to embark on a brighter chapter. The measures being put in place by the Government of Jamaica, including the Jamaica Debt Exchange (JDX) and lower interest rates will have a positive impact on the private sector, particularly small and medium enterprises. Like its South American neighbours, it is expected that the aforementioned efforts, in unison with capital inflows from the IMF and other multilateral institutions will help to reinforce Jamaica's macroeconomic underpinnings and pave the way for further reform.
Shari DaCosta is a Research Analyst at Stocks & Securities Ltd. You can contact her at sdacosta@sslinvest.com
