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Ministry of Finance and the Public Service Fiscal Policy Paper 2021 Page 102

Figure VII (f): Annual Point to Point Inflation Projections vs Actual Outturns

Source: STATIN, BOJ, MOFPS

Note: Projections and actual outturns read in percentage and forecast errors read in percentage point. Interest Rates The Government’s exposure to changes in interest rates is measured by the share of variable rate, and near to maturity fixed rate debt in the debt portfolio. In an effort to reduce this risk, the GOJ’s debt management strategy features the issuance of mainly fixed-rate debt instruments. At end-December 2020, the share of variable-rate debt in the GOJ’s portfolio was 27.2 percent, a 4.2 percentage point reduction from end-March 2020 (see Table VII (b)).

Table VII (b): Interest Rate Composition of Debt Stock

end-March 2020

end-December 2020

Change

Domestic Debt 36.1 23.9 (12.2)

External Debt 28.5 29.1 0.6

Total Debt 31.4 27.2 (4.2)

Source: MOFPS The 3-month Treasury Bill rate and the 3-month USD LIBOR are the reference rates primarily used to reset interest rates on the variable rate portion of the domestic and external debt portfolios, respectively. The onset of the COVID-19 pandemic has led to the US Federal Reserve (Fed) reducing the federal funds rate by a total of 150 basis points during the 2020 calendar year, in an effort to stimulate economic activity. This accommodative monetary policy action has influenced a decline in the 3-month USD LIBOR rates which fell by 87 basis points to end the calendar year at 0.23 percent (see Figure VII (g)). In the domestic market, the Bank of Jamaica (BOJ) has maintained its policy rate at 0.50 percent since August 2019. This has supported a reduction in the cost to service domestic debt, with the 3-month Treasury bill rate falling from 1.25 percent in January 2020 to 0.77 percent in December 2020 (see Figure VII (h)).

-2.0

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2.0

4.0

6.0

8.0

FY2016/17 FY2017/18 FY2018/19 FY2019/20 FY2020/21 Pe

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Forecast Error Projection Actual

...
June 12, 2021


Page 10

7

The variable-rate GGLs are referenced to LIBOR or the 6-month Weighted Average Treasury

Bill Rate. The downside to holding variable-rate debt is that any upward movements in these

base rates would result in increased debt service costs. Benchmark rates in the external

(3-month LIBOR) and domestic (3-month T-bill) markets have been relatively stable over the

review period but are trending in opposite directions. The 3-month T-Bill has been on a firm

downward trajectory over the last 6 quarters, in part due to increased domestic currency liquidity.

3-month LIBOR however is trending upward, as the US+Federal+Reserve">US Federal Reserve (FED) continued to

tighten liquidity in the US economy. Expectations are for benchmark rates in the domestic and

external markets to remain low over the near term – assuaging worries about adverse movements

in interest rates.

3.3 Inflation Linked GGL and Inflation Risk

As at end-September 2017, inflation linked debt accounted for approximately 11.0 percent of the

GGL portfolio. However, inflation risks were entirely concentrated in the domestic portfolio

where $14 billion or 39.0 percent of the stock of domestic GGL, at end-September 2017 was

inflation linked.

Figure 6: Share of CPI Linked Domestic GGL at end-September 2017

Source: Ministry of Finance and the Public Service

The relatively large share of inflation linked guarantees in the domestic GGL portfolio exposed

the GOJ to risk from increases in the Consumer Price Index (CPI). The impact of changes in the

CPI on the value of inflation-linked GGLs has been significant. Figure 7 shows an initial

issuance of inflation linked GGL of $3.6 billion in March 2002, now valued at $14.2 billion at

end-September 2017. This is an increase of over $10.0 billion, or an average annual increase of

roughly 20.0 percent. The large revaluation of the principal balance outstanding was due mainly

to the relatively high inflation rates that prevailed throughout most of the last 15 years. More

recently however, lower inflation and lower inflationary expectations have mitigated some of the

risks associated with CPI linked GGLs. Over the nine-month period, January to September 2017,

61%

39%

Non Inflation Linked GGL Inflation Linked GGL

...
June 11, 2021


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