Davies IF there was ever any doubt that there was a split between the Ministry of Finance and the Bank of Jamaica as wide as the Grand Canyon the last couple of weeks should confirm it.
On the one hand we have a debt management unit at the Ministry of Finance that issued in August a US$225 million bond at 13 1/8 per cent, which clearly thought the move would have no effect on local interest rates or the exchange rate. On the other, a central bank, which seems to be concerned only with inflation and the exchange rate.
The result is a hopelessly inadequate policy framework and an economic programme in tatters less than three months after it was handed to the International Monetary Fund (IMF).
And make no mistake about it, the programme set out by the Minister of Finance Dr. Omar Davies in July to the IMF will have to be radically altered when the staff-monitored programme (SMP) team comes to visit for the first time in December.
And, a lowering of interest rates, the most important aspect of the programme, the central plank on which it is premised, is clearly not going to happen as planned.
Think globally, act locally is a popular saying these days. It's one I've heard the Finance Minister utter before. Well, we have made a global mistake, with local consequences.
The mistake was to issue the US$225 million bond with poor advice from Bear Stern's, another of those Wall Street whiz kids that has run rings round the Finance Ministry.
Just think, Bear Sterns had told the Finance Ministry that the US bond would not be sold here. It also advised that it needed to be floated yielding 13 1/8 and that it would be purchased by "new investors from outside the country". Hogwash.
According to local brokers, as the deal closed they were told that they better get in now because it was going like hot cakes.
Yet a few days after the deal closed the bond was "liquid" or freely available in the secondary market. So local brokers, who were being offered US dollar funding by Stateside financiers at 9 per cent, jumped at purchasing the bond yielding about 12.8 per cent.
Then investors really got an appetite for the best deal in town and began to switch into US dollars to take account of a tax free instrument that had a better yield than was being offered on domestic debt.
Another thing I have learnt is that investors are clearly switching out of the Jamaican dollar into hard currency, just not in the way I had expected. Watching those foreign "A" accounts is not going to give us an indicator of what's happening in the market.
People are not touching hard currency savings. They are literally changing the rest of their Jamaican dollars into US to take advantage of such deals.
I hate to say I told you so, but I and many others warned that this deal would turn the market upside down and it has.
The Wednesday following the deal I reported the pressure the bond was putting on the dollar. I asked at the time: "Will the Jamaican dollar continue to depreciate in value against its US counterpart or will interest rates begin to rise again? That was the question being asked this week in money market circles in the aftermath of the Government's US$225 million fund raising exercise.
"Over the last couple of days since the bond issue the dollar has fallen about 75 Jamaican cents to trade at around US$1 to $43.70."
I also added: "Although the issue of debt was sold overseas as much as US$100 million may have ended up in the hands of Jamaican investors, according to one industry source."
Well we have our answers. The dollar has slipped, and interest rates are on the rise again. And more than US$100 million is now held by Jamaican-based investors.
What has compounded our problem is that we waited, until the worst possible moment to do something about the slippage in the dollar, which was trading over $46 last week.
The Ministry of Finance should have issued an index-linked bond weeks ago to tackle the excess liquidity. It would have sucked money out of the system and they might have gotten away with a bond yielding 19 per cent.
Instead, it failed to roll-over a maturing issue, leaving more funds free to find a new home, which was in hard currency.
Then the Ministry comes to the market for medium to long term LRS last week, which ends up yielding just less than 19 per cent.
The day after the BoJ struck and burnt all those brokers, who were short selling, looking to make a killing as they expected interest rates to fall. Instead of making gains the brokers now find themselves facing a painful Christmas and heavy losses.
That's all part of the market but its clear rates are on the way up again.
This sorry series of events tells me a number of important things.
The Treasury and the central bank are woefully out of step with each other. One is concentrating solely on managing the debt profile and our cashflow concerns, while the other is focusing on inflation and the exchange rate.
It is the Minister's job to co-ordinate these functions and ensure that the two are working towards a greater goal, growth. This latest episode is the clearest sign for some time that the economy is being horribly mismanaged.
More to the point, many of the targets given to the IMF are out of whack.
1. Inflation is currently running at 4.2 per cent for the first five months of the fiscal year to the end of August. With inflation running at about 1 per cent on the back of rising food prices due to the drought, we can safely assume the 4 to 6 per cent target range set at the Budget is not going to be hit. Unless we have some serious deflation, which would simply mean we are in more of a state than I had anticipated.
2. Interest rates should be at about 15 per cent, according to Government forecasts. But the bond means that rates that were moving in the right direction are now heading back up.
3. Dr. Davies's April growth forecast for the fiscal year of 2 to 3 per cent of GDP had shrunk to 1.5 per cent by July and his IMF letter of intent. It is now non-existent, given the extent of the drought, which has hit agriculture hard.
More importantly, last week's events have left money managers understandably nervous. Those that had locked into three-to-ten-year money at 18.4 to 19 per cent, were rudely aware the next day that they should have avoided being quite so confident and not invested for the long term.
If the Government's policies have had any consistency about them, they have clearly illustrated why you should not invest for the long term. The hike in interest rates on one year money only adds to the problems the Government are likely to have when they come to market with another ten-year issue.
I expect interest rates to rise as a result. If they don't, raising debt may become a quiet occupation.
So, the bill for maintaining our all important debt pile, which gobbles up two-thirds of the budget, is likely to be larger than we had anticipated. Thus, our hopes of presenting a balanced budget are growing slimmer and slimmer each day.
As one who pleaded with the government to maintain its links with Citibank, which has bailed it out more than once, I can't help thinking that we still do not understand the value of relationships in financing.
Effectively, the Government was stiffed by Bear Sterns and could have paid fees as much as US$9 million for the privilege. Who was it that was sold on the idea that the US dollar bond was not going to end up here? Inept debt managers, who continue to make costly mistakes that tax payers such as me have to fork out for.
Local brokers and money managers, had to buy the issue at less than the market rate. But they still set the floor for trading in the secondary market and were bound to end up with a large chunk of the debt, so why not cut them in and benefit from there advice, distribution networks and probably cheaper price.
Everyone but the Government made a killing on the US dollar bond. What is worse, we are now told we wasted US$151 million in trying to defend an overvalued currency before we unsettled the domestic debt market and ruined our chances of bringing down interest rates.
If there is a logic to such thinking I eagerly wait to see it explained. If there is not, admit it and get some better advice, fast.
