PIOJ Growth-Inducement Strategy - Planning Institute of Jamaica

Commercial Bank loan rates have also declined, albeit more modestly. The
weighted average loan rate at commercial banks declined more modestly,
moving from approximately 23% in January 2010 to 18% by year-end.
With returns on GOJ instruments – the nominal risk-free rate in domestic currency – at
historically low levels, there is potentially an opportunity to revitalize activity in the
corporate debt market as an alternative mechanism for raising short and medium-term
financing for working capital and/or investment financing. The revitalization of activity
in corporate debt markets, and in particular, the commercial paper market, will
significantly increase competition with traditional bank loans and reduce the cost of
capital for financing productive activity.
However, stamp duty and property taxes are significant impediments to the issuance and
trading of corporate debt. The following “back of the envelope” calculations are
illustrative. Currently, commercial bank rates for prime commercial credits are in the
region of 13% - 14% per annum. We estimate the risk premium for high quality corporate
debt as 5%, which is the modal commercial bank loan risk premium over the last 10
years. 54 Based on the existing rates on “risk-free’ GOJ debt mentioned above - we use
the rate on six-month Treasury bills as a benchmark – and abstracting from taxes and
other transactions costs, it is conceivable that a dealer could structure a commercial paper
instrument on behalf of an investment grade company and successfully price this debt
such that:
investors get risk-adjusted returns superior to the rate on GOJ
the borrowing firm accesses financing at rates competitive with commercial bank
rates.
However, the stamp duty applicable to demand promissory notes (of which commercial
paper is an example) is effectively 5% of the value of the security ($10 per $200). Within
this context, the tax wipes out any competitive advantage offered by the debt instrument.
The situation is further compounded by the fact that, in the case of medium to long-term
debt, their marketability depends heavily on the extent to which such debt can be traded
in secondary markets, subsequent to an investor acquiring these securities. However,
stamp duty and property taxes would operate in a manner similar to the example above to
reduce the tradeability of these securities. 55
It is also recognized that stamp duties and property transfer taxes may be a factor
inhibiting the portability of loans across financial institutions, and thereby acts as a
constraint on the refinancing of debt. The cost of switching property between institutions
54 Data sourced from http://data.worldbank.org/indicator/FR.INR.RISK/countries?page=1
55 To the extent that transfer taxes apply to the trading of debt securities, the 4% ad valorem rate would be
additional to the applicable stamp duties.
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