Audley Shaw

INVESTORS ARE in a wait-and-see mode as they cautiously watch the Jamaican Government wobble towards an agreement with the International Monetary Fund (IMF) - its chosen cradle in the current economic storm.

Without that agreement, the Government will face another crisis: lack of confidence.

The Jamaican economy has been crumbling under the impact of the global crisis with a fallout in foreign-exchange earnings and capital flows, as well as a scarcity of loans from the international capital market.

So while tax revenues are under-performing, debt charges are mounting, and other operational expenses are eating away at the reduced revenue pool.

Jamaica's total debt level now stands at $1.3 trillion, and climbing.

Already, the Government is finding it hard to meet its debt obligations, of which, interest cost and principal repayments this year will total about $325 billion.

Additionally, it has been under increasing pressure to increase public-sector wages and salaries.

At the end of September, six months into the fiscal year, Government spending had outpaced revenues and grants by $65.8 billion.

Tax revenue, the Government's major source of earnings, fell short by $12.9 billion for the period April to September.

fiscal accounts

The fiscal accounts is one of the most closely tracked economic indicators by players in the bond market, and right now, with very little trading activity taking place, analysts believe it is time to be cautious.

"Locally and internationally, it is a time to be cautious, wait and see. When recovery takes hold, then we can build a diversified investment portfolio in a calculated way," said Charles Ross, managing director of Sterling Asset Management Limited.

"Given the falling interest-rate environ-ment, persons should approach medium- to long-term issues with caution, depending on their level of liquidity and immediate cash-flow needs," said Rex Shettlewood of Mayberry Investments limited.

"As such, for those with lower levels of liquidity, the focus should be towards three to six months issues. Consequently, for those cash-rich investors, Treasury bills and medium- to long-term government issues may be considered. GOJ globals are also an appropriate option for these investors, but should be cautioned for the long-term nature in the present market environment," said Shettlewood.

The bond-market performance remains weak and shows increasing signs of inactivity with low investor confidence.

"Activity in the bond market remains relatively weak, with little or no activity currently in the market. During September, we did see a slight recovery of GOJ global bond prices, but this was short-lived, as in October, the prices fell slightly, as most participants are on the sidelines awaiting the outcome of the discussions between the Government and the IMF," said Johann Heaven, vice-president strategic planning, projects and product development at Scotia DBG Investments Limited.

Jamaica has 13 global bond issues - most of which are denominated in US dollars - held by local and overseas investors.

For the week ending October 30, the market saw little trading activity as buyers cautiously stayed on the sidelines. The GOJ 10.625 per cent eurobond 2017 saw no trading, even though there were offers at $100.

The GOJ eight per cent 2039 had several offers but no take-up, while the 2019 showed just minimal trades.

The local bond market remained relatively quiet.

"There is very little trading activity. It is very difficult to buy and sell bonds in the market," said Ross.

"I imagine there is a lot of uncertainty in the market with the Government yet to finalise agreement with the IMF. So people are now in a wait-and-see mood - both local and international players - to see if there will be a return of confidence in the market," Ross added.

Both Heaven and Ross agreed that once the IMF agreement was in place and the uncertainty behind the country, then there would be increasing activity and a return of confidence to the market.

bond-market performance

"The performance of the bond market will be heavily dependent on the Government's performance over the next few months," said Heaven.

"If they successfully secure the IMF funding and can credibly put forth a budget that will see a reduction of the fiscal deficit from its current levels, then we should see a recovery in the market and an appreciation of bond prices and hopefully, a reversal of the recent downgrade by Standard and Poor's of Jamaica's debt."

Added Ross: "The sentiment around Jamaica is that a rally on the market depends on the deal with the IMF. How much people believe they will meet the various targets and how that will bring a positive turnaround, then certainly, we will see a recovery in the local bond market in line with economy."

With the country facing tough conditions and the prospects of continued severe contraction in the economy, Minister Shaw months ago told Parliament that Jamaica had no choice but to return to a borrowing relationship with the IMF and would be going after a US$1.2 billion standby loan facility.

There is general agreement that at this time, there is no better alternative.

Already, the Bank of Jamaica has got a US$303 million drawdown, equivalent to 74 per cent of Jamaica's quota of special drawing rights, that boosted the country's foreign reserves to US$1.9 billion.

sabrina.gordon@gleanerjm.com

Johann Heaven

Charles Ross