BOJ Governor Scores JDX Success at IDB Network

In structuring and executing the Jamaica Debt Exchange (JDX), the single most important success factor was to get all major stakeholders to agree on what would constitute its ultimate success.
This observation was made by Governor of the Bank of Jamaica, Bryan Wynter, during his presentation to the 31st Meeting of the Latin American Network of Central Banks and Finance Ministries, recently held in Washington D.C. under the auspices of the Inter-American Development Bank (IDB).
The Central Bank Governor was requested to make a special presentation on the ‘Recent Debt Management Initiatives in Jamaica’, in the wake of Jamaica’s historic debt swop initiative, hailed internationally as a record-breaking event, having achieved a success rate of over 99 per cent.
With respect to the most important lesson learnt, Mr. Wynter emphasized that the transaction must be underpinned by a broader programme of reforms that investors could buy into.
“The JDX was not conceptualised nor communicated simply as a financial transaction, but rather as an integral part of Jamaica’s strategic economic programme. This economic programme included significant fiscal reforms and supporting policies, aimed at the virtual elimination of the fiscal deficit within four years, as well as institutionalising principles of prudent fiscal management,” he said.
Mr. Wynter informed the meeting that the strategy for implementing the JDX was developed after extensive consultations with participants across all market segments.
“Great care went into ensuring that the transaction treated all creditors in a manner that was fair and equitable. In fact, in structuring and executing this complex initiative, the single most important success factor was to get all major stakeholders to agree on what success would looks like,” Mr. Wynter explained.
He also noted that the domestic debt re-profiling exercise had to be a comprehensive transaction that would address all of the Government’s domestic publicly traded debt, amounting to $700 billion or 65 per cent of GDP.
“For the transaction to be successful, we would have to target 100 per cent participation of domestic bondholders with the aim of having an equitable sharing of the cost. The transaction would have to achieve significant extension in the debt maturity profile, while lowering the interest costs of the GOJ. Finally, and perhaps most importantly to Jamaicans, the transaction would have to maintain the constitutionally mandated obligation of the GOJ to honour its debt obligations,” he pointed out.
The Central Bank Governor further explained that the strategic plan for the JDX was designed to provide the country with a comprehensive policy change, that would address the fundamental challenges affecting the economy, and not just the symptoms of those challenges.
“Consequently, a multi-pronged and multi-stakeholder approach would be required to hammer out a strategic plan to enable Jamaica to emerge from its precarious position with minimal impact on the stability of the financial sector and the economy as a whole. The stakeholders that would have to be brought to the table would include the private sector, the banking sector, households and the civil service,” he said.
With respect to structuring the JDX transaction, Mr. Wynter explained that care was taken to ensure that the transaction was clear, simple and transparent.
A critical deliverable for the central bank was the stability and resilience of the financial system during and after the transaction, which Mr. Wynter noted was critical, given that the financial system held 65 per cent of the domestic debt.
He said that the portfolios of the financial system were carefully stress-tested to evaluate the susceptibility to market risks, and that a fund to provide emergency liquidity to institutions, which had participated in the transaction, was conceived.
“Against this background, a Financial System Support Fund (FSSF) of approximately US$950 million was contemplated, to be funded by resources from the IMF, the World Bank and the Inter-American Development Bank (IDB),” he stated.
Mr. Wynter said the transaction was customized to allow for the dematerialization of 350 separate paper-based registered bond issues with low levels of liquidity, to be replaced by 24 significantly more liquid book-entry securities.
“The new securities were placed along the maturity spectrum to facilitate the development of a domestic yield curve. The resulting yield curve is now reported on daily by Bloomberg and has already much enhanced the price discovery process in domestic trading,” he added.
Evaluating the performance of the JDX, the Central Bank Governor described the transaction as a resounding success.
“By the close of the transaction, the debt profile was significantly altered,” he stated.
He explained that: the weighted average maturity of the domestic debt, after the JDX increased by 4.5 years to 9 years, a level which had not been achieved in all the years leading up to the JDX; the fixed rate and newly introduced CPI-linked portion of the domestic debt increased to 41 per cent from 34 per cent; and the average coupon on outstanding domestic debt declined by an average of 6.5 per cent to 12.5 per cent, rates comparable to domestic borrowing costs in the period immediately prior to the financial crisis in the United States and Europe.
The estimated interest cost savings for the Government is J$41.0 billion annualized
In response, multilateral agencies endorsed the reform agenda with financing of US$2.4 billion over the next two years.
According to Governor Wynter, that level of support from the IMF, the IDB, and the World Bank helped to build confidence, not only for the JDX but also for Jamaica’s medium-term economic programme. In addition, rating agencies have signalled the game-changing nature of these efforts, as they upgraded the ratings on Jamaica’s sovereign bonds from Selective Default (SD) to grades higher than pre-JDX.
He also observed that since the JDX, spreads on GOJ global bonds have narrowed significantly and the new bonds which were issued, as part of the exchange, are trading above par.
He also pointed out that anecdotal information suggests renewed interest in GOJ global bonds by international investors who, prior to the JDX transaction, had off-loaded their holdings to domestic bondholders. If sustained, this could be described as perhaps the acid-test of the success of the JDX.
With respect to the country’s key macro-economic indicators, Mr. Wynter disclosed that there have been significant improvements.
“Bank of Jamaica’s macro-prudential index, which synthesises all the macroeconomic variables into a single indicator, has declined towards pre-Lehman Brothers collapse levels. This is primarily as a result of the marked reduction in the volatility of the exchange rate and the inflation rate, as well as our significantly reduced exposure to currency risk,” he said.