Thread by @marcgayle

I have gotten a few questions about this, and I do owe you guys a few threads, so let me explain what’s happening here and why it matters.

Basically, when govts borrow money it looks different than when you and I borrow.

//Thread

https://twitter.com/LoopJamaica/status/1175198214565314560

When we borrow, we go to 1 bank, and we apply for a loan and we compete with all of the other people that want to borrow from that pool of funds in the bank. Sure, sometimes you can go to multiple banks and play them off of each other, but the average person doesn’t do that.

When the average govt wants to borrow, what they do is go to investors and say “I am interested in borrowing $XB, in small chunks, who wants to lend me at Y interest?” All the investors then compete to lend the govt the money. As investors compete, they are willing to...

accept less interest because they really want to lend to the govt (because govt debt is the safest debt in any country).

So, govts borrow money at different time lengths and interest rates.

In this instance, the @MOFJamaica and @DrNigelClarkeJa decided to do a very prudent thing.

They took stock of all the debt owned by investors outside of Jamaica, they looked at our most expensive debt (foreign currency debt with highest interest rates) that are due soonish...

...and decided to essentially swap it with debt that has much lower interest rates and are due later.

Whenever a debt becomes due, as in the full balance needs to be paid, what govts tend to do is just borrow more money to repay the balance that is due.

So in effect, all they keep paying is the interest on the debt. That works while things are going good, but once you can’t keep borrowing (say in a financial crisis), then you are at risk of default.

The sooner you have to pay is the more risky your debt profile is.

So, what you want to do is essentially push the date when you have to repay the entire loan to a later date. If you can do that and even reduce the amount you spend on interest that’s a great position to be in.

Usually when you do that, your principal remains the same.

In this instance, the Minister was able to push back the due date on a lot of the debt owned by foreign investors, bring down the overall interest rate AND reduce principal. All to the tune of savings of $2.5B per year and reducing our total debt by $4.725B JMD (at $135:1).

Here are the killer points to me:

- Before this deal, 36% of Jamaica’s external debt was due after 10 years.
- Now that figure is up to 46% due after 10 years.

Also:
- Before: Approx. 1% of Jamaica’s external debt was due after 20 years.
- Now up to 21% due after 20 years.

This is also within the context of a general concern about a global recession around the corner. Whenever there is talk of a global recession, most investors look for “safety” (ie bonds by developed countries - US, Canada, EU, UK, Japan, etc.). Not developing country bonds...

because those are considered riskier relative to the developed bonds.

So the fact that they were able to issue new debt with the offer being oversubscribed by 3X is a huge vote of confidence in the economic policies by the last 3 administrations and policy continuity.

Now GOJ is able to free up $2.5B in interest payments every year.

For context, per the Min Nat Sec speech, this year:
- 60 Police Stations will undergo major renovations for $443M
- 7 Police Stations will be rebuilt and renovated for $1B.

So this 1 transaction could allow MNS to rebuild & renovate another 14 Police Stations (assuming the same cost) for $2B, renovate 60 more and still have $7M leftover.

So these financial transactions matter and it just further improves our economic prospects.

Because the ppl building & renovating those police stations are earning income. That income goes to pay their bills, buy groceries, send their kids to school, etc. So it leads to economic activity.

So as GOJ frees up more resources by doing moves like this...

it just creates more space for more economic activity and can even allow the Minister to cut taxes even further next year (if he wants), while still paying down our debt at a fast rate and accelerating economic growth.

So this bodes very well for us.

#FinanceTwitterJA

I just wrote another thread that is related to this one 👇🏾👇🏾

https://twitter.com/marcgayle/status/1175595823041789952?s=21

So my original tweet says that prior to the deal, 1% expired after 20+ years. That figure came from the Loop article.

Based on the Gleaner article below, it should have been 11.7% prior to the deal and 21% after.

jamaica-gleaner.com/article/busine…