Jamaica's debt lacks vital pause clause
Demand for "debt pause clauses" could increase after it became clear just how vital they would have been for Jamaica as it struggles to recover from the devastation wreaked by Hurricane Melissa.
While Jamaica has some financial provisions in place, including a US$150m catastrophe bond from the World Bank, the country does not have climate resilient debt clauses on its international bonds in US or Jamaican dollars, although they are in some recent multilateral development bank loans, sources said.
“The case of Jamaica shows the urgent need to integrate comprehensively the use of CRDC-language in the external debt of vulnerable countries,” said Eric Lalo, executive chairman for sovereign advisory at Rothschild.
CRDCs – also known as debt pause clauses – were championed by Barbados at the UN-sponsored COP28 climate meeting in Dubai in 2023 but uptake has been slow.
Hurricane Melissa, a Category 5 storm, did damage that was conservatively estimated by Jamaica's prime minister Andrew Holness at US$6bn–$7bn, which is roughly equivalent to 28%–32% of last year's GDP.
Holness warned that those costs would push up Jamaica's debt-to-GDP ratio and short-term economic output could decline by 8%–13%. Jamaica's public debt declined to 73% of GDP in 2023/24 and was heading downwards, but Hurricane Melissa could push it back towards 100%.
US forecaster AccuWeather has estimated damages from Hurricane Melissa across the Caribbean of US$48bn–$52bn, with the most severe impact in Jamaica, Cuba and Haiti.
Cat bond
While Jamaica will get a full payout on its US$150m catastrophe bond that was put in place with the World Bank in May, the cover has proved expensive and is dwarfed by the damages, sources said.
The catastrophe bond has an estimated interest bill of 11%–12.5%, which leaves around US$135m for disaster relief after payments are deducted, the sources said, adding that Jamaica would have been able to borrow more cheaply in the market at around 6% and for larger amounts.
The country's 7.875% 2045 bond was changing hands on Monday at 120.82 to yield 6.052%, while its 8% 2030s were trading on Wednesday at 119.775, according to MarketAxess data.
According to this year's IMF Article IV report in June, Jamaica's total 2025 debt service is US$3.6bn-equivalent, or 16.4% of GDP, which comprises US$2.4bn-equivalent of external debt servicing and US$1.2bn-equivalent domestic debt.
“Had Jamaica had natural disaster clauses in even half of its public debt stock, it would likely have over US$1.5bn to redirect towards reconstruction efforts in the next 12 months alone," said Sebastian Espinosa, a managing director at White Oak Advisory.
The World Bank said it is readying assistance for Jamaica, combining quick-disbursing emergency finance, the redeployment of existing project funds and targeted private sector support through the International Finance Corp, World Bank Group’s private sector development arm.
Breathing space
CRDCs are a short-term liquidity support tool that can give governments breathing space during severe climate-related or natural disasters to respond immediately to their citizens' needs.
Barbados prime minister Mia Mottley has pioneered their use, most recently on Barbados' US$500m 2035 note in June but also on its 2022 debt-for-nature swap and 2018 debt restructuring.
"Barbados’ primary market Eurobond issuance earlier this year provides clear evidence that the market accepts natural disaster clauses and their rationale," Espinosa said.
More countries are expected to consider adding debt pause clauses. In July, the Debt Pause Clause Alliance was launched at the UN's Fourth International Conference on Financing for Development in Seville, Spain, to increase their use.
Countries including Canada, France, Spain, the UK and several multilateral development banks joined the initiative that aims to accelerate the systematic inclusion of CRDCs in public and private lending agreements and develop common principles and standard contractual language.
“This is a terrible time for the people of Jamaica and we must all learn from this experience to ensure we can improve the way in which we help build the financial resilience of countries that are particularly vulnerable to climate change," Espinosa said.
Jamaica may have to carry out some liability management exercises to extend the maturity of its debt once the damage and the cost of repairs had been properly assessed, a sovereign debt adviser said. But for now, the market remains optimistic that Jamaica’s finances may not need a major overhaul.
“The reconstruction work could boost the economy," said the adviser. "If I were an investor, if it is clear you will not be wiped out, I would not run and sell at this point. There are a lot of real-money investors in the bonds and they would not want to take an actual loss."
In September, S&P upgraded its rating on Jamaica by one notch to BB, noting it was the only sovereign it rated to have produced an annual primary surplus above 3% of GDP for 10 consecutive years.