Trevor AlleyneTrevor AlleyneWestern Hemisphere Department

International Monetary Fund

Why debt is bad?

The impact of debt on growth

Two Caribbean cases:

◦ The case of Jamaica

◦ The case of Antigua and Barbuda

The Caribbean: Public Debt-to-GDP, 2009(In percent ) 30

The Caribbean: Debt-to-GDP Change, 2005-09

ATG

GRD

JAM

SKN

( p )

0

10

20

LCA

BLZ

VCT

DOM

BRB

-30

-20

-10

Includes Impact of

0 50 100 150 200

SUR

TTO

GUY

BHS

-60

-50

-40

Includes Impact of Debt Restructing Operations

Debt in some Caribbean countries is among the highest in the world

And has been sustained at high levels for several years

60SUR TTO GUY BHS LCA BLZ VCT DOM BRB ATG GRD JAM SKN

is among the highest in the world... levels for several years...

10

ECCU-6: Contribution to Changes in Public Debt(in percent of GDP)

6

8

101998-04 avg2005-07 avg2008-09 avg

Other Caribbean: Contribution to Changes in Public Debt 1/

Countries with Rising Debt in 2000-08(Bahamas, Barbados, Jamaica)

4

6

8

10

1991-97 avg 1998-04 avg

2005-07 avg 2008-09 avg

-6

-4

-2

0

2

4

-2

0

2 -10

-8

Real GDP Primary balance (ex. grant)

Grants Interest Price effect Other factors Total increase

8

10

1998-04 avg2005-07 avg

Countries with Declining Debt 2000-08(Belize, Guyana, Suriname, Trinidad and Tobago)

-6

-4

Real GDP Primary balance

(ex. grant)

Grants Interest Price effect

Other factors 1/

Total increase

-6

-4

-2

0

2

4

6g

2008-09 avg

In the ECCU, large fiscal deficits and interest bills have contributed to debt accumulation,

In the rest of the Caribbean, the impact of heavy interest bills dominates as a key contributor,

1/ Includes the effect of debt restructurings, privatization, recognition of off-balance sheet liabilities and increases in debt by public enterprises.

-10

-8

Real GDP Primary balance (ex. grant)

Grants Interest Price effect Other factors Total increase

,magnified by off-balance sheet events.

y ,followed by that of ad-hoc events...

30

Treasury Bill Nominal Rates, 2000-09(In Percent)SKN

40

5

10

15

20

25

BHS

BRB

LCA

VCT

20

30

o G

DP

(200

0-08

)

0BHS BRB JAM GRD LCA

20

Treasury Bill Real Rates, 2000-09(In Percent)

ATG

BHS

BLZ

DMA

GRD

VCT

0

10

in D

omes

tic D

ebt

to

-5

0

5

10

15

GUY JAM

SUR TTO

-20

-10Cha

nge

Rising total debt has relied heavily t d ti dit

But the response of traditional market i di t i till li it d i t

-10BHS BRB JAM GRD LCA

-80 -60 -40 -20 0 20 40 60Change in total debt to GDP (2000-08)

on access to domestic creditors... indicators is still limited in most cases...

World: Real per Capita GDP Growth During Periods of Rising d F lli D bt 1970 2007¹

5.35

6

5

6

owth

2 Falling debt

Rising debt

and Falling Debt, 1970–2007¹

2.0

3.2 3.2 3.22.7

1 6 2

3

4

2

3

4

apita

GD

P gr

o(P

erce

nt)

1.5 1.6

0.81.1

0

1

2

0

1

2

U n d e g n d

Per c

a

ECC

U

Car

ibbe

an(N

on

EC

CU

)

Adva

nce d

Econ

omie

s

Em

ergi

n g&

D

evel

opi n

g Wor

l d

Sources: Heston, Summers, and Aten (2009); and IMF staff calculations. Based on the Fiscal Monitor (IMF 2010b), p. 63.¹ Initial debt > 60 percent of GDP. p2 Average for subsequent 5 years.ECCU includes Antigua & Barbuda, Dominica, Grenada, St. Kitts & Nevis, St. Lucia, and St. Vincent & the Grenadines.Non-ECCU Caribbean includes the Bahamas, Barbados, Belize, Guyana, Jamaica, Suriname, and Trinidad & Tobago.

Caribbean: Effect of Debt on Growth ¹(Percent)

0.4

0.6

0.4

0.6Growth if debt at 60 percent of GDPGrowth if debt at emerging and developing countries level

(Percent)

0.20.2

-0.2

0

-0.2

0

-0.4-0.4ECCU Commodity exporters Other Caribbean

Source: IMF staff calculations.¹ A 2009 d bt t GDP l l d ( i ) t 60 t 44 9 t f GDP¹ Assumes 2009 debt-to-GDP levels drop (or increase) to 60 percent or 44.9 percent of GDP.

160

Jamaica: Gross Debt to GDP Ratio(percent)

100

120

140

40

60

80

0

20

Public Debt by Instrument and Variability 1/ Holdings of GovernmentDirect Debt 2/

External

Petro-Caribe, 5%

Public Debt by Instrument and Variability 1/(percent of total public debt)

Commer-cial BanksPetrocaribe

Other3%

Holdings of Government Direct Debt 2/(percent of total government direct debt)

Fixed, 34%

Domestic Variable,

34%

cial Banks13%

SecForeign

Official creditors

16%

Petrocaribe6%

3%

Sec. Dealers

and Merchant

Banks27%Domestic

individuals5%

gholders of eurobonds

6%

External Variable,

7%

Domestic Fixed, 19%

Pension funds4%

Insurance11%

BOJ9%

5%

Sources: IMF staff calculations based on data from MoFP, Petrocaribe Fund and Banking sector balance sheets.1/ Includes government guaranteed debt./ f2/ Assumes 80 percent of eurobonds are held domestically. Does not include government guaranteed debt.

International capital market ff ti l l d

1,400

40

45

effectively closed. Domestic creditors

demanded large increase in 1,000

1,200

25

30

35

40Money MarketT-billSpreads, bps(RHS)

interest rates to rollover maturing debt, while also shortening maturities. 600

800

15

20

25

gInterest bill jumped to over 16 percent of GDP in FY2009/10. 200

400

0

5

10

Rating agencies downgrade debt

2002 2003 2004 2005 2006 2007 2009 2010Source: JP Morgan, Jamaican authorities and Fund staff calculations.1/ Jamaican interest premium is estimated as the sum of risk free rate (proxiedby the U.S. Federal Funds rate), emerging market premium (proxied by the EMBI+ index), Jamaica sovereign premium (proxied by the blended yields on Jamaica Eurobonds) and Jamaica currency premium (the difference between Jamaica 6 month T-bill yields and other identified risk premiums).

Fiscal measures to increase primary surplus: tax rate increases, wage freeze.

Structural reforms in the fiscal area, especially those aimed at strengthening PFMaimed at strengthening PFM.

Focus of adjustment expanded to the public entities, which had been responsible for a significant part of public sector expenditure and debt generation.

Address debt overhang: responsible for weak economic growth and periodic bouts of financialeconomic growth and periodic bouts of financial market volatility, impeding sustainability of past fiscal adjustment efforts.

Protect stability of financial system.o Detailed (institution-by-institution) stress testing carried out.o No principal haircut.o Financial sector support fund.

Legal clarity.◦ Legal aspects of the debt exchange (including constitutionality) were

thoroughly analyzed to minimize potential sources of contention. g y y pDebt exchange was voluntary.

Creditor buy-in.◦ Numerous consultations with bond holders about their balance sheet

needs in order to maximize the demand for the new instruments.◦ Strategic communication with rating agencies to influence their

assessment of the debt exchange and the post-exchange outlook.

Allocation ruleso Targeted reduction in the share of variable rate and US$-

denominated debt to lower exchange rate and interest rate risk.o Increase maturity of the debt stock

Simplify functioning of debt market◦ The new (benchmark) bonds—25 in total, comprised of 11 fixed, 9

variable, 3 US$-denominated, and 2 CPI-index bonds—replaced a ab e, 3 US$ de o ated, a d C de bo ds ep acedover 350 different securities in circulation.

Call option to be exercised; use of tax surcharges.Alth h ti i ti l t h ld t ld b◦ Although participation was voluntary, no holdout would be allowed to obtain a competitive advantage by opting out of the operation.

IMF Stand-By Arrangement IMF Stand-By Arrangement.◦ By late 2009, strong market sentiment that, without an agreement

soon, Jamaica would quickly tumble into an economic and financial crisis. Government announced “No debt exchange, no g ,IMF”.

Financial Sector Support Fund.◦ Financed by the multilateral institutions to provide liquidity support y p q y pp

(at non-punitive rates) in the event of negative effects of debt exchange. Access to the fund open only to institutions that exchanged over 90 percent of the old bonds in their portfolios.

Par-neutral exchange of domestically-issued GOJ bonds for new bonds with reduced coupons andbonds for new bonds with reduced coupons and extended maturities.

Eligible bonds (J$701.6 billion)◦ Average interest rate◦ Average interest rate J$-denominated – 19 percent US$-denominated - 9 percent

◦ Average maturity – 4.7 yearsg y y New bonds (J$695.6 billion) – 99.5 percent

participation◦ Average interest rateg J$-denominated – 12.5 percent US$-denominated - 7 percent

◦ Average maturity – 8.3 years

Flat ER 3 percent inflationFlat ER, 3 percent inflation

Discount factor (%) 12 15 18 20

NPV (J$ million) 1/ 698,418 612,393 543,416 504,635

Haircut (%)

ER depreciates 3 percent, 6 percent inflation

Discount factor (%) 12 15 18 20( )

NPV (J$ million) 1/ 705,557 618,644 548,901 509,667

Haircut (%)1/ The face value of the bonds exchanged is $J 695.6 billion, with the amount of eligible bonds at $J 701.6 g $ , g $billion.

120,000

140,000

160,000

180,000

Fixed rate

Pre-JDXIn J$ millions

40,000

60,000

80,000

100,000Fixed rateVariable rateUSD

0

20,000

160 000

180,000

Post JDXIn J$ millions

100,000

120,000

140,000

160,000

Fixed rateVariable rateUSDCPI

Post-JDXIn J$ millions

20,000

40,000

60,000

80,000 Non-Participants

0

25Interest Expenditure(In percent of GDP)

5Overall Balance

(In percent of GDP)

15

20

(In percent of GDP)

-5

0

(In percent of GDP)

10 -10

0

5Passive

Program measures-20

-15Passive

Program measures

45

50Gross Financing Needs

(In percent of GDP)

160Public Debt

(In percent of GDP)

30

35

40

( p )

140

150( p )

10

15

20

25

120

130

0

5

10PassiveProgram measures

100

110PassiveProgram measures

Key sources of risk to capital positions of financial institutions did not materialize.◦ No request to access FSSFP iti ti f t t l d t Positive reception of program strategy led to market rally:◦ Interest rates on govt. securities have fallen to lowestInterest rates on govt. securities have fallen to lowest

level in over 30 years.◦ J$ appreciated strongly during 2010C h i d bt t f till Comprehensive debt management reform still needed.

Operational design and pre-launch preparation

Burden sharingC i ti St t Communication Strategy

Strong support from multilateral institutionsNo principal haircut No principal haircut

Social consensus Useful lessons for Euro area EMEs Useful lessons for Euro-area EMEs◦ Financial sector holds bulk of debt, thus safeguarding

financial sector stability will be important consideration.

Between 1998 and 2009, the debt-to-GDP averaged 117%, with a peak of 142% in 2004., p

Poor track record led to the accumulation of arrears close to half of the total debt. St t t b di i i l i t t f Statutory bodies increasingly important sources of financing (Soc. security fund, Medical benefits scheme).

By end-2009, 2/3 of the total debt owed to domestic creditors, with heavy involvement of indigenous banks. , y g

Less than 15% of total debt owed to Paris Club. Currency risk not an immediate issue…

Debt would have been unsustainable unless restructured.

Normalize relations with all creditors;W k bil t ll ith i di b k t d d bt Work bilaterally with indigenous banks to reduce debt service burden

Reach agreements with statutory bodiesg y Resolving arrears with domestic suppliers frequently

with writedownsCl ith ltil t l Clear arrears with multilaterals

Restructuring of bilateral debt (Paris Club). IMF Program—key to regain creditors’ confidence IMF Program key to regain creditors confidence.

Pillars of Restructuring:◦ Ring-fence the indigenous banks (safeguard financial systemRing fence the indigenous banks (safeguard financial system

stability);◦ Ring-fence RGSM (prevent possible regional spillovers);◦ Offer comparability of treatment;Offer comparability of treatment;◦ Be transparent

Goals of Restructuring:◦ Complete elimination of arrears;◦ Reduction of debt service by 3½% of GDP;◦ Shift debt trajectory towards 60% of GDP by 2020 (ECCB target);◦ Open up windows to new sources of financing.

What has been achieved:◦ Extension of maturity and reduction of interest rates charged by

indigenous banks (overdraft accounts long-term loans); ◦ Elimination of arrears with SS and MBS (issuance of long-term

bonds, regularization of contributions, and sizeable haircuts);◦ Bilateral agreements with domestic suppliers (mid-size haircuts);◦ Paris Club Agreement (see details);◦ Paris Club Agreement (see details);◦ Deal with major commercial external creditor (mid-size haircut).

Still to be done:◦ Payment of arrears to multilaterals (no haircuts);

R hi d bt t t i t ith P i Cl b◦ Reaching debt restructuring agreements with non-Paris Club bilaterals (China, Kuwait, VEN).

Debt service-to-GDP reduced by 3½ percentage points;D bt t GDP ti f ll b 26 t i t t 94% Debt-to-GDP ratio fell by 26 percentage points—to 94%;

Antigua and Barbuda: Total Debt Service Pre- and Post-Debt Restructuring(in millions of Eastern Caribbean dollars)

2,000

2,500

Total debt service pre-debt restructuring

Total debt service post-debt restructuring

(in millions of Eastern Caribbean dollars)

500

1,000

1,500Includesclearance of arrears

0

500

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Ministry of Finance; and IMF staff estimates.

Debt ratio still high;G t l fi i i t (18% f GDP) i Gross external financing requirement (18% of GDP) in 2011-16;

Fiscal discipline being maintained under the program;p g p g ;