Jamaica's prime minister announces new debt exchange to avoid "dismal future"

Jamaica's Prime Minister Portia Simpson Miller announced on Monday (Feb 11) in a televised speech the launch of a new debt exchange on Tuesday as part of a national effort to avoid a "dismal future" for the Caribbean nation. The country's debt has spiraled to over 140% of GDP and approximately 55 cents of every dollar in the government budget is spent on debt payments. Another 25 cents goes to paying public sector wages, leaving only 20 cents for other expenditures, said the country's finance planning and public service minister Peter Phillips. Simpson Miller said that the current level of debt makes it virtually impossible for Jamaica to grow and invest in services like education, health care and infrastructure. The Jamaican economy is estimated by the IMF to have expanded by only 0.9% last year and the forecast for this year is GDP growth of a mere 1%. "There can be no doubt at this time that we are in the throes of a serious economic crisis. It is going to take hard work, discipline and sacrifice to overcome," she noted, while calling on the entire nation to support the government's new efforts to turn the economy around. The prime minister pointed out that a new debt exchange to reduce the country's debt is a crucial part of a new financing agreement that Jamaica is close to securing with the IMF. Phillips said that the objective is to reduce the debt ratio to around 95% of GDP over the next seven years. THE NEW DEBT EXCHANGE In 2010, the country implemented a similar program called the Jamaica Debt Exchange (JDX), which recorded an investor participation rate of 99.2%. Phillips said he understands that investors might feel disappointed to once again be asked to participate in a debt exchange, but he noted that the high level of debt leaves the country with "no option." Under the National Debt Exchange Offer, investors will not be forced to accept a haircut on their investment, but they will be asked to exchange higher interest debt for lower cost debt through new bonds that will carry lower interest rates and longer maturities. These bonds are expected to be issued later this month. The minister said that the exchange would entail "significant sacrifices" and be "painful" for the country's financial institutions and holders of domestic debt. The new debt exchange aims to reduce the country's debt to GDP ratio by 8.5% annually between now and 2020, he said. Ratings agency Standard and Poor's said on Tuesday that it views the debt exchange as a default since investors will end up getting less than they were originally promised when buying the government bonds. Consequently, S&P lowered its foreign and local currency sovereign credit ratings on Jamaica to SD from B-/B, while cutting the ratings on the bonds that are included in the debt exchange to D. The agency also lowered the ratings on government securities not included in the debt exchange to CCC. The foreign currency ratings were reduced because the debt exchange also includes bonds denominated in foreign currency that were issued on the domestic market. The agreement that is being negotiated with the IMF also includes public sector and tax reform as well as several reforms and initiatives aimed at boosting economic growth and job creation.