That much talked about US$2B loan, was it a good deal for Jamaica ?

I have allowed all the  analyst (independent and political) as well as political commentators, news writers etc to say their piece before I commented. I will tell you this, I was asked by a few readers via email to comment on the deal as they anxiously await what I have to say on this one, which has been given thumbs up by the IMF and most economics and financial analysis.

Background

The Jamaica government is seeking to buy back US$3B of Petrocaribe debt at a steep discount of 50%, meaning instead of paying back US$3B, the GOJ would payback just US$1.5B if they chose to take up this offer.

No doubt this would be a very good deal, but it means us being very responsible in how we choose to undertake this buy back.

Had the government of Jamaica taken a loan for just the amount for which the Petrocaribe deal was worth, it would have reduced Jamaica’s debt to GDP by just about 8.81%, but due to the Minister apparent need to get money to finance the upcoming elections, he took an extra US$500m, thus cutting the debt to GDP ratio by 5.88%

Now this is where most analyst have been focusing, simply because this is the net effect of this entire structural adjustment program, but what is the true cost to Jamaica and was it worth in in the end

Jay’s Analysis.

Original  PC debt  $     3,000,000,000  Savings
Write off  $     1,500,000,000  $        1,500,000,000
Petrocaribe Debt  $     1,500,000,000
New Debt  $     1,350,000,000  $        650,000,000
Orginal Int Rate(PCD) 1.00%
New Ave Int 6.750% 7.875%
 Duration 13 30
 Total Int Payment
Total Int Payment  $         681,406,136  $    1,046,662,377  $        1,728,068,513
Net Savings  $          (228,068,513)
Total Payment  $     2,031,406,136  $    1,696,662,377  $        3,728,068,513

The savings to be gained by purchasing for this 50% discount is US$1.5B, the total interest payments over the life of these two loans will be $1.728B

What this is saying, is that due to the interest rate at which the Minister of finance took these two loans, it will cost the country an additional US$228M (Ja $26.8b) in interest payment, if both are held to maturity.

If we should look at the current debt owed, which stands at US$3B and were this to be held for 25 yrs at 1%, which I believed was the Petrocaribe loan terms, the total interest payment over this period would have been US$391,852,088 .

Under this new arrangement which is being praised both locally and the IMF, the total interest payment on the US$2B loan, will be US$1.72B for a total payout at maturity ( interest and Principal) of US$3.728B.

Had the Minister not taken that extra $650m on which we will end up paying interest of US$1.046B, I would have said we got a good deal, but unfortunately I cannot say so at this point in time as the maths does not allow me to arrive at that position.

The Minister of Finance appeared to have hastily arrived at the position he did, for reasons only he knows and did not get the best possible loan terms.

He has also not stated why he choose to take an additional US$500M and how he plans to spend this money.

The word is a significant portion of this money will be used to help prepare for National elections and if this is true, it really would be a a tragedy, but that is not beyond the capacity of this government, who is willing to do anything to win an election.

I know some good financial analysts will suggest that we cannot compare two different projects ( loan ) with various maturing dates ( timelines) and so I have sought to address that, by looking at monthly interest payments, as shown in the table below.

Original  PC debt  $     3,000,000,000  Savings
Write off  $     1,500,000,000  $        1,500,000,000
Petrocaribe Debt  $     1,500,000,000
New Debt  $     1,350,000,000  $        650,000,000
Orginal Int Rate(PCD) 1.00%
PC Mthly Int Pay  Current debt obligation/mth  $              11,306,173
New Ave Int 6.750% 7.875%
 Duration 13 30
 Total Int Payment
Mthly Int Payment  $           13,021,834  $            4,712,951  $              17,734,785
Net Change/mth  $              (6,428,612)
Total Pay/yr  $         156,262,008  $          56,555,412  $            (77,143,344)

As we see, this new arrangement increases of debt obligation by a whopping US$6.428M per month or Ja$ 755m per mth. 

On an annual basis our debt obligation now becomes a whopping US$77.143m per year or Ja$9.06b per annum.

Summary

This new US$2B deal will cut our Debt/GDP ratio by around 5.88% in one swoop, but in the end it will add over US$228B  or JA$26B to the national debt in interest payment alone, over the life of both loans.

In context of the IMF deal, it is good

In terms of the country, very bad deal.

What this goes to show is to CANNOT focus on a single metric ie a single factor, as we can see in this case , our Debt/GDP ratio will get lower, but that comes at a US$228M cost to the country over the next 15 -30 years.

The above shows the danger or focusing on these numbers and how it can allow people to not seek out the best possible deal to dig ourselves out of trouble

Petrocaribe offered us a great deal and yet we managed to screwed it up royally by not seeking better loan rates.

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