The Jamaica Debt Exchange launches on 14 January 2010, achieves 100 per cent participation from eligible creditors, and within weeks sends Treasury bill yields from seventeen per cent toward ten per cent — while the IMF Stand-By Arrangement of US$1.27 billion, approved on 4 February, provides the external anchor that stabilises the dollar and begins to restore the confidence the property market has lacked since September 2008.
Highlights
- JDX swaps J$700 billion of domestic bonds at 100 per cent participation — a complete restructuring of the domestic debt stock
- Weighted average coupon on government debt falls 650 basis points to 12.5 per cent
- 15-year government bond yield declines from 19.3 per cent to 13.5 per cent by end-March
- IMF Stand-By Arrangement of US$1.27 billion approved on 4 February 2010
- Annual fiscal savings of 3.5 per cent of GDP free resources previously consumed by interest payments
- Commercial lending rates begin to fall from their 16-17 per cent range toward single digits over the coming year
On 14 January 2010, the Golding government launched the Jamaica Debt Exchange. Within days, it became clear that the mechanism had achieved something that sceptics had doubted: complete participation. Every eligible holder of the J$700 billion in domestic government bonds that were offered for exchange had agreed to swap their existing high-yield instruments for new bonds carrying lower coupons and longer maturities. The weighted average coupon on the domestic debt stock fell by approximately 650 basis points, settling near 12.5 per cent. The fifteen-year government bond, which had been yielding 19.3 per cent at the end of 2008 when Jamaica’s fiscal crisis was most acute, fell to 13.5 per cent by the end of March 2010. Short-term Treasury bill yields, which had been running at sixteen to seventeen per cent at year-end 2009, were tracking below the Bank of Jamaica’s thirty-day benchmark rate of ten per cent by April.
Three weeks after the JDX launch, on 4 February 2010, the IMF Executive Board approved a Stand-By Arrangement of US$1.27 billion for Jamaica. The programme established targets for the primary fiscal surplus, limits on new borrowing, and conditions governing monetary policy — the external scaffolding that would prevent the fiscal backsliding that had derailed previous periods of Jamaican economic management. For the exchange rate, the IMF approval was immediately stabilising: the programme’s resources provided a credible backstop to the BOJ’s reserve position, signalling to currency markets that Jamaica had the external support to defend the dollar against speculative pressure. The Jamaica dollar, which had been drifting toward J$90 per United States dollar, began to find firmer footing.
The combined impact on the property market’s prospects was the most consequential change in its operating environment since the BOJ began raising rates in 2007. The mechanism by which high government bond yields had suppressed commercial lending rates was well understood: banks holding government paper at sixteen to nineteen per cent had no incentive to lend to private sector borrowers at lower rates, and the risk premium they required for non-sovereign credit pushed commercial mortgage rates to levels that excluded most potential buyers. As government bond yields fell toward thirteen per cent, the opportunity cost of commercial lending fell with them. The compression was not immediate — banks needed to assess the durability of the JDX and the IMF programme before repricing their mortgage books — but the direction was unambiguous.
The fiscal savings generated by the JDX were equally significant for the long-term property market outlook. At 3.5 per cent of GDP annually — roughly J$40 to J$50 billion at prevailing income levels — the reduction in the government’s interest bill freed resources that could be directed toward infrastructure investment, social housing, and the public sector wage improvements that support formal-sector employment and NHT contribution levels. None of these benefits would materialise immediately: the government remained under the IMF programme’s fiscal constraints, which required that the primary surplus be maintained and that new borrowing stay within specified limits. But the trajectory had shifted from one in which an expanding interest bill was crowding out every other form of public spending, to one in which the burden was declining.
The JDX did impose costs on its participants — specifically, on the financial institutions and pension funds that had purchased government bonds at high yields and now saw those yields reduced involuntarily, albeit within a framework described as voluntary. Life insurance companies, commercial banks, and the NHT itself — which held significant quantities of government paper — recorded lower income on their bond portfolios. For NHT, whose lending capacity is a function of its overall financial position, this represented a constraint on future mortgage availability even as the exchange rate stabilisation and rate compression trend improved the broader conditions for property transactions. The net effect on the trust’s ability to support the property market was positive, but more slowly than the headline improvement in government bond yields might have suggested.
On the ground in Jamaica’s property market, the first quarter of 2010 was one of cautious anticipation rather than renewed activity. Real estate agents reported more inquiries than had been seen in twelve to eighteen months, with buyers who had been sitting on the sidelines since 2008 beginning to re-engage with the market. Sellers who had refused concessions in 2008 and 2009 were now willing to negotiate, having watched three years of minimal transaction activity erode their confidence in the original asking prices. The bid-ask spread, while still wide, was narrowing. The transactions that were completing tended to be those where both parties had accepted that the market of 2010 was not the market of 2006, and had priced accordingly.
What This Means
The first quarter of 2010 is the turning point — the moment when the conditions that suppressed Jamaica’s property market for three years begin to reverse. The JDX’s 100 per cent participation and the IMF programme’s approval represent not merely fiscal events but the restoration of the two preconditions for a functioning mortgage market: affordable interest rates and exchange rate stability. The path from here to a fully recovered property market is measured in years, not months. GDP will still contract in 2010. Unemployment will continue to rise. Commercial lending rates will decline gradually as banks absorb the new yield environment. But the inflection has occurred. The six to eighteen month outlook is one of gradual recovery — improving transaction volumes, returning developer confidence, and the first commercial bank mortgage approvals since 2007 for borrowers who had previously been priced out. Jamaica’s property market is not healed. But it is, for the first time in three years, healing.
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