Jamaica: Summary Bond Terms Jamaica Global Bonds 10.5%, %, %, %, 2019

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1 Jamaica: Summary Bond Terms Jamaica Global Bonds 10.5%, %, %, %, 2019 Issuer Government of Jamaica Currency EUR USD Interest Accrual Date October 27, 2004 June 2, 2005 June 20, 2002 June 24, 2008 Tenor at Issue 10 Years 10 Years 15 Years 11 Years Time Remaining Till 1.67 Years 2.29 Years 4.33 Years 6.33 Years Maturity Duration Maturity Date October 27, 2014 June 2, 2015 June 20, 2017 June 24, 2019 Maturity Type Bullet Bullet Bullet Sinkable Coupon 10.5% p.a (October) 9% p.a. semi-annual (June % p.a semi-annual 8% p.a semi-annual & December) (June& December) (June& December) Bond/ Issuer Rating Caa3 (Moodys; March Caa3 (Moodys; March Caa3 (Moodys; March Caa3 (Moodys; March 2013), CCC+ (S&P; March 2013), CCC+ (S&P; March 2013), CCC (Fitch; March 2013), CCC (Fitch; March 2013), CCC+ (S&P; March 2013), CCC (Fitch; March 2013), CCC+ (S&P; March 2013), CCC (Fitch; March 2013) 2013) 2013) 2013) Use of Proceeds General Budgetary General Budgetary General Budgetary General Budgetary Recommendation HOLD HOLD BUY BUY Price/ Yield Data 1 Price: $104.9 Price: $ Price: $ Price: $ Yield to Maturity: 7.029% Yield to Maturity: 6.396% Yield to Maturity: 7.597% Yield to Maturity: 8.175% 1 As at March 27, 2013 Page 1 of 14

2 Jamaica Global Bonds %, %, %, %, 2039 Issuer Currency Government of Jamaica Interest Accrual Date December 19, 2001 October 18, 2005 February 28, 2006 March 15, 2007 Tenor at Issue 21 Years 20 Years 30 Years 32 Years Time Remaining Till 8.92 Years Years 23 Years Years Maturity Duration Maturity Date January 15, 2022 October 17, 2025 February 28, 2036 March 15, 2039 Maturity Type Bullet Bullet Bullet Sinkable Coupon Bond Rating Use of Proceeds % p.a semi-annual (January & July) Caa3 (Moodys; March 2013), CCC+ (S&P; March 2013), CCC (Fitch; March 2013) Repay / Refinance Debt and General Budgetary 9.25% p.a. semi-annual (April & October) Caa3 (Moodys; March 2013), CCC+ (S&P; March 2013), CCC (Fitch; March 2013) General Budgetary USD 8.5% p.a semi-annual (February & August) Caa3 (Moodys; March 2013), CCC+ (S&P; March 2013), CCC (Fitch; March 2013) General Budgetary 8% p.a semi-annual (March & September) Caa3 (Moodys; March 2013), CCC+ (S&P; March 2013), CCC (Fitch; March 2013) General Budgetary Recommendation BUY BUY HOLD HOLD Price/ Yield Data 2 Price: $ Yield to Maturity: 6.328% Price: $ Yield to Maturity: 8.634% Price: $ Yield to Maturity: 8.844% Price: $ Yield to Maturity: 9.129% 2 As at March 27, 2013 Page 2 of 14

3 Government of Jamaica Bonds - Analysis Country Overview Jamaica has been consistently characterized by negative to minimal economic growth, declining labour productivity levels and reduced international competitiveness, which only compounds the socioeconomic instability caused by rising unemployment and widespread crime and gang violence. A major contributor to the setbacks in economic growth and productivity is the country s persistent budget deficits coupled with a high debt burden which has been at unsustainable levels for several years. Based on the current economic conditions in the country, the required fiscal reform condition for the Government of Jamaica to secure international assistance from the International Monetary Fund (IMF) caused the government to launch the National Debt Exchange (NDX) programme in February 2013 to restructure J$860 billion of marketable domestic debt of the Government of Jamaica (GOJ). This was the second debt swap executed by the Jamaican government in three years. The high debt burden has limited the government s potential to provide necessary services in order to achieve sustained rates of growth and increased welfare for citizens. The country has reached this situation as a result of years of fiscal mismanagement and government bailouts to ailing sectors going as far back as the 1990s. Another challenge for the island nation comes in the form of limited resources being available to fund infrastructure and development projects. Coupled with the general poor condition of the economy, Jamaica has also been experiencing international trade challenges in the areas of the transhipment and cultivation of illegal drugs. This is complemented by elevated levels of corruption which makes Jamaica a favourable location for money laundering and the execution of various supporting illegal financial transactions. As the economy remains in a state of inertia, the absence of an IMF agreement has resulted in pressure on the local currency and on local interest rates. Despite the negative economic sentiment associated with Jamaica, the country still has the potential for robust growth through trade opportunities and Page 3 of 14

4 strategic investments. With its central Caribbean location, the country is within the shipping lane to the Panama Canal and is in relatively close proximity to large markets in the North American region and several emerging market economies in Latin America. Jamaica also offers an abundance of foreign direct investment opportunities in various sectors inclusive of tourism, construction, manufacturing, financial services and information communication technology. With regards to tourism, the industry accounts for approximately 5-8% of Gross Domestic Product (GDP) and represents one of the growing sectors within the Jamaican economy due to its direct linkage with other dominant economic activities such as agriculture, health, sports, manufacturing and education. As a result of this, there are various sub-sectors which show promising growth prospects especially sports tourism and medical tourism. In these areas there are unique opportunities which the country can take advantage of in order to gain additional visibility in international markets. As it relates to the governmental system in Jamaica, the country was granted independence from Britain on August 6, 1962 and operates by its own constitution that sets out laws by which the Jamaican people are governed. The constitution includes provisions for freedom, equality and justice for all citizens. This commonwealth realm operates under the system of a parliamentary constitutional monarchy with legislative power vested in the dual system Parliament of Jamaica which consists of the Senate and elected House of Representatives. Queen Elizabeth II has been the head of state since February 1952 and is represented by the Governor-General of Jamaica, Sir Patrick Allen. True leadership of the Government of Jamaica is carried out by Prime Minister The Most Honourable Portia Simpson-Miller and her cabinet. Page 4 of 14

5 Jamaica: Economic Indicators 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% Real GDP Growth 2.1% 1.6% 0.6% -0.1% -0.2% -0.2% -0.6% Jun 11 Sept 11 Dec 11 Mar 12 Jun 12 Sept 12 Dec 12 Jamaica has consistently recorded low to no low growth. In 2011, the economy managed to enjoy real GDP growth of 1.5% which represented the first annual increase since the onset of the global economic downturn in By 2012 this progress was reversed as measured by the consistent contraction in real GDP. As an average for all quarters, the economy recorded real GDP growth of %. 14.0% 13.0% 12.0% 11.0% Unemployment Rate Unemployment has been gradually increasing over the period from 11.4% in 2009 to the latest released data of 13.7% for October Data released by the Statistical Institute of Jamaica (STATIN) for this most recent labour force survey shows that the largest declines in employment levels were recorded in the construction, wholesale and retail, motor vehicle and equipment and manufacturing sectors. 10.0% * % 11.4% 12.4% 12.8% 13.7% Page 5 of 14

6 Jamaica: Economic Indicators Inflation, Consumer Prices 2012* 8.0% % % % 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% Inflation % Change Jamaica s inflation rate reached a high for the 4-year review period in 2010 of 11.7%, which was mainly attributed to elevated prices on select food products in the last quarter of that particular year due to a severe tropical storm which badly affected the agricultural sector. Since then, inflation has declined and Jamaica is currently recording single digit inflation. Once this trend is maintained it is believed that there will be a translation into an increase in the overall international competitiveness of the Jamaican economy. % of GDP Public Deficit (Government net lending/ borrowing) 0.0% -2.0% -4.0% -6.0% -8.0% Jamaica: Economic Indicators -10.0% -12.0% * Public Deficit -11.0% -6.2% -6.5% -8.3% Jamaica s public deficit figures indicate that the government has not been able to effectively manage its finances because it has been consistently missing the fiscal deficit target goal. The government is consistently on a mission to effectively balance the budget in the medium term through a strategy of cutting back on spending in particular sectors while reforming taxes, such as the most recently announced package which is expected to rake in J$ 15.9 billion in additional tax revenue. Page 6 of 14

7 Jamaica: Economic Indicators Public Debt % % % % %115.00%120.00%125.00%130.00%135.00%140.00%145.00%150.00% Public Debt (% of GDP) Jamaica s public debt has been treading dangerously on an unsustainable path. With one of the world s highest debt burdens, Jamaica recorded a debt to GDP of approximately 146% in 2012 which leaves very little to no room for effective public investments in infrastructure to improve education or public healthcare systems. This unsustainably high debt level coupled with the government s quest to ink a deal with the IMF caused the country to undertake a debt exchange initiative in February This was the second of its kind in 3 years which exchanged higherinterest Government of Jamaica (GOJ) debt for lower-cost debt. Weeks Net International Reserves Jan-13 Feb-13 Weeks of Goods & Services Imports 12 Weeks of Goods & Services Imports There has been significant and continuous pressure on the country s Net International Reserves (NIR) because of the greater outflow of foreign currency than inflow. As of February 2013 the NIR has decreased to alarming levels and stands at US$939.53M which represents weeks coverage of goods & services imports. This level is below the suggested level (12 weeks) as stipulated by the IMF and is the first time the NIR has fallen below US$1B since January Page 7 of 14

8 Jamaica: Economic Indicators 19.00% 17.00% 15.00% 13.00% 11.00% 9.00% 182 Day Treasury Bill Interest Rates Interest rates have trended downward from a high of 16.80% in December 2009 to as low as 6.22% in March The data suggests that based on the recently closed National Debt Exchange, interest rates have fallen. This is in tandem with the historical trend that illustrated a fall in interest rates after the Jamaica Debt Exchange in % 5.00% Mar-13 % 16.80% 7.48% 6.46% 7.18% 6.22% *Estimated Figures Page 8 of 14

9 Jamaica Global Bonds Historical Data Jaman Bonds Average Historical Prices ( Maturity) Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar , 10.5% 2015, 9% 2017, % 2019, 8% JAMAN bonds with maturities between 2015 and 2019 have been experiencing an increase in prices especially after the closure of the National Debt Exchange in February With the recent closure of the National Debt Exchange (February 2013) in the Jamaican economy, the prices of all the aforementioned bonds have been increasing. The 2014 bond is the only one in the current selection that is denominated in a currency other than USD (denominated in Euros) and, as at March 26, 2013, recorded a last price of $ with an average yield to maturity of 7.041%. The 2019 bond is currently trading below par at $ (March 27, 2013) with an average yield to maturity of 8.175%. At this price the 2019s may prove to be an attractive addition for investors with a medium term horizon seeking a high yield, in comparison to market benchmarks. 3 Historical Data retrieved from Bloomberg terminal as at March 27, 2013 Page 9 of 14

10 Jamaica Global Bonds Historical Data Jaman Bonds Average Historical Prices ( Maturity) Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar , % 2025, 9.25% 2036, 8.5% 2039, 8% On the longer end of the JAMAN curve (maturities between 2022 and 2039), the 2022 and 2039 bond prices have experienced a marginal decline in prices while the 2025s and 2036s have experienced a slight upward movement in prices. The 2022, % bond is currently the highest priced security on the curve and recorded a last price of $ on March 26, 2013 with an average yield to maturity of 6.327%. On the furthest end of the JAMAN curve, the 2036s and 2039s prices will continue to be comparatively more responsive to changes in interest rates, which will prove attractive to long term investors especially if the expectation is that the decline in interest rates will continue. Page 10 of 14

11 Jamaica Global Bonds: Spread Analysis 6.00% 6 Month Historical Spread Analysis 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 US 10 Year vs Jaman 2022 Trin 2020 vs Jaman 2019 Barbad 2035 vs Jaman 2036 Trin 2027 vs Jaman 2025 Relative to Caribbean benchmarks, Trinidad & Tobago (Baa1; Moody s, A; S&P) and Barbados (Ba1; Moody s, BB+; S&P) the associated yields on Jamaica Global bonds may be said to be fairly attractive given the current rating as a measure of the default risk (Caa3; Moodys, CCC+; S&P). When weighed against comparable Caribbean sovereign bonds (Barbados & Trinidad and Tobago), the yields on the JAMAN bonds are moderately attractive and, as of March 2013, there was a premium in terms of yield for holding the JAMAN 2019s over the Trinidad and Tobago 2020 issue. As of March 2013, the spread was 526 bps which is representative of the differences in rating and risk between Trinidad and Tobago and Jamaica Global bonds. There is also a premium for holding JAMAN 2036s over the Barbad 2035s due to the fact that the market factors in a higher risk of default on the JAMAN bond due to its lower rating. Comparatively and overall, it is clear that for these Caribbean benchmarks measured against the JAMAN suite of bonds, there is a premium for holding Jamaica global bonds over other bond issues due to the fact that the market predicts a lower risk of default on the benchmarks as opposed to JAMAN bonds. Page 11 of 14

12 Jamaica Global Bonds: Spread Analysis For this analysis it was also necessary to compare the JAMAN bonds to the yields offered on securities with the lowest possible risk of default, US Treasury Bonds. For the US 10-Year Treasuries compared with the JAMAN 2022s, the spread as of March 2013 was 448 bps and proves to be an indication of the premium investors will receive for holding more risky debt over securities which hold the lowest risk of default (US treasuries). It is interesting to note that the spread of JAMAN 2019s over the T&T 2020 bonds is greater than the spread of the JAMAN 2022s over the 10 Year US Treasuries. On the surface, this may seem that T&T bonds are less risky than US Treasuries; however the difference in greater spread can be attributed to the fact that the JAMAN 2019s is one of the more liquid bonds along the entire JAMAN curve. The 10-Year US Treasuries are backed by the full faith and credit of the U.S. government; hence these securities offer lower yields relative to other bonds because they are considered to have the lowest level of default risk. JAMAN Bonds: Risk Factors 1. Adverse external factors such as unexpected regional economic events may have a negative impact on the country s productive activities. 2. Serious socio-economic maladies such as political unrest along with elevated levels of crime and violence may have a negative impact on the productive capacity of the Jamaican economy. 3. Jamaica, as an island in the middle of the Caribbean Sea, is extremely vulnerable to volatile weather systems such as hurricanes. 4. The country is highly reliant on remittances and tourism for a significant portion of foreign exchange revenues, which is dependent on the condition of the global economy, especially North America. 5. Jamaica currently possesses an unsustainably high debt burden which continues to cripple economic growth and development. 6. There may be an inherent liquidity risk associated with these bonds as there may not be simultaneously available sellers in the market to supply potential buyers of these securities. Page 12 of 14

13 Although this is not a major associated risk when considering JAMAN bonds, potential investors must be cognizant of the fact that market conditions may fluctuate and there could be an increased level of uncertainty or inversely, investor confidence at any point in time, which could affect the availability of these bonds on the secondary market. 7. Policies imposed by the Government of Jamaica in the future such as the adjusting of any interest rates will have an impact on bond prices. Duration analysis is used to measure this interest rate risk and demonstrates the sensitivity of bond prices to a change in interest rates. Based on the duration calculations, for every 100 basis-point (1%) decrease in interest rates for the JAMAN bonds, it is expected that bond prices will increase by 1.41% (2014), 1.93% (2015), 3.35% (2017), 4.75% (2019), 5.92% (2022), 7.21% (2025), 9.82% (2036), and 10.15% (2039) respectively. The aforementioned Jamaica global bonds are fixed-rate in nature and consequently, if there is any change in interest rates, investors will see bond price changes reflective of the increasing volatility associated with a longer time until maturity. Page 13 of 14

14 Outlook & Recommendation In the near term, the outlook on Jamaica is rather uncertain although the economic condition may stabilise somewhat once the government manages to sign off on an agreement with the International Monetary Fund (IMF). The JAMAN bonds remain unaffected as a result of the country s recently concluded debt exchange. However, the ratings are now highly representative of the risks associated with these high yielding bond issues. Investors may choose to invest in fixed-income investments for varying reasons which may range from a long-term steady income stream to short-medium term capital gains. For the investor seeking a steady income stream, our recommendation is that they invest in securities on the shorter end of the JAMAN curve; highly recommending the 2017s and 2019s as a BUY. With regards to long-term investors with a healthy risk appetite we recommend the longer-term JAMAN bonds with special emphasis on the 2022s and 2025s as a BUY. This recommendation has been put forward with the informed expectation that interest rates will fall. As this happens, the bond prices are expected to increase which will allow bondholders to realise greater potential capital gains in addition to the periodic interest payments. For investors that currently hold the JAMAN 2014s, 2015s, 2036s and 2039s we recommend a HOLD on these securities while on a general scale we strongly advise potential investors to ensure that they diversify their portfolios, so as to achieve the most favourable risk-adjusted returns in the current global macro-economic climate. Sources: International Monetary Fund (IMF), World Economic Outlook October 2012, Central Intelligence Agency (CIA) World Factbook 2012, Bank of Jamaica (BOJ), Planning Institute of Jamaica (PIOJ), Ministry of Finance and Planning, Statistical Institute of Jamaica (STATIN), Bloomberg. Disclaimer: This Research Paper is for information purposes only. The information stated herein may reflect the opinion and views of VM Wealth Management in relation to market conditions and does not constitute any representation or warranties in relation to investment returns and the credibility of the sources of information relied upon in the preparation of this report, without further research and verification. Before making any investment decision, please consult a VM Wealth Management Advisor. Page 14 of 14