Prime Minister P.J. Patterson (centre) leads members of his team for the opening of the new parliamentary year. - Rudolph Brown/Staff Photographer
THE PRIVATE sector is often asked to comment on the question "What's wrong with our economy?" Against the background of the results of the recent survey of business and consumer confidence in Jamaica, our analysis shows that our country suffers from two fundamental problems.
The first problem can be defined as follows: The Government, since 1996, has spent more than it earns. The results of this action are clear - fiscal deficits that result in growing debt, high real interest rates, crowding out of private sector credit and disincentives for capital to seek real sector investments versus financial instruments.
The second problem is somewhat related. Our country consumes more than we produce. The results of this are also clear - current account deficits that result in growing debt as we borrow externally to finance consumption and periodic currency instability.
The above problems and the results are irrefutable. However, over time, problems can create more fundamental consequences than the ones we have identified. Before identifying a key factor adversely impacting our economy currently, it is important to summarise the current economic model and policy framework.
Since the 1990s, policymakers in the Ministry of Finance and at the Bank of Jamaica have pursued a strong dollar, low inflation model. Economic analysis estimates that approximately 60% of inflation is "imported", by keeping the currency relatively stable, inflation would remain in check. The results have been impressive, single digit inflation since 1997 and since 2000, the NIR has been above the benchmark of 12 weeks of imports.
The results of this policy seemed to be working except for occasional bouts of currency volatility.
On September 11, 2001, the entire world was thrown into uncertainty. The reaction in Jamaica was no different. Interestingly, seven months after 9/11, Jamaica found itself with T-Bill yields in the low teens, BoJ repo rates at all-time lows, bank lending rates down to 20 - 24% and healthy NIR levels. Businesses began to sense that conditions were improving.
Well, what has gone wrong over the last 12 months? Investor and consumer confidence begin to decline. This was fuelled by a series of occurrences that converged and aligned in such a way to put us where we are today. Below is a chronology of these events and our interpretation.
EVENT 1 - JUNE 2002
The Ministry of Finance goes to the overseas market and registered to issue up to US$500 Million, accepting only US$300 Million, despite heavy subscriptions for its 2017 Global Bond issue.
Conditions were favourable for the Jamaican issue as investors shunned equity markets in favour of bonds with the U.S. economy weakening, interest rates falling and the Dow retreating. The Ministry of Finance sees the strong interest as a "guarantee" that funds will be available later in the fiscal year. An additional $200 Million was programmed to repay Euro200 Million due in February 2003, and the decision was to borrow closer to the maturity date. At that time, as information flowed into the market and the level of subscription became available, some market participants expressed the opinion that the GoJ should take the funds available and prepay the February 2003 maturity. This opportunity was passed. The US$ closes at $48.51.
EVENT 2 - SEPTEMBER 2002
Election fever heats up. The market starts to factor the possibility of a JLP victory and the possibility of a trade-off between lower interest rates and the exchange rate. Some investors decide to sit on the sidelines in US$ until after elections.
In 2001, the Central Bank had tightened the system by issuing high yielding 365 day repos.
In September 2002 - heading into tamarind season-with huge bulges of liquidity set to re-enter the market from BOJ repo maturities-interest rates at an all time low-elections around the corner-oil prices moving - a widening current account deficit-the country's debt over $500 Billion - a series of local floods and widespread damage-slowing economic activity and lower tax collections-war drums beating in North America-poor economic news and job cuts coming out of our biggest tourist market-weak economies and stock markets globally-investors began to seriously weigh the real prospects for Jamaica's future. Investor confidence begins to weaken. The Bank of Jamaica sells foreign exchange to the market and pushes up its repo rates. The US$ closes at $49.27.
EVENT 3 - DECEMBER 2002
The Ministry of Finance decides not to re-finance a maturing Index Bond. Investors had expected the bond to be rolled and sold US$ in anticipation of purchasing the new instrument.
EVENT 4 - DECEMBER 2002
The Minister of Finance announces supplemental budget estimates and disclosed to the country that the budget deficit will be 8.4% of GDP, twice the deficit expected.
Shortly after this announcement, S&P changes Jamaica's outlook from stable to negative citing the debt levels and fiscal problems. Investors start buying back US$ as the index bond does not materialise and the price of Jamaica's bonds fall. Investor confidence wobbles further as pressure on the currency builds. The US$ closes at $50.97.
EVENT 5 - JANUARY 2003
The Minister of Finance is steeped in controversy. His taped speech made at a party meeting linking the deficit to the election outcome creates a national furore.
Even strong supporters of the Minister express displeasure with his statements. Some think the Minister's political stature is seriously diminished. His reputation as well-reasoned in his decision-making process and a prudent keeper of our diminishing public purse is hurt. Investor confidence takes another serious blow. The US$ closes at $52.63.
EVENT 6 - FEBRUARY 2003
The Ministry of Finance decides not to re-open the 2011s, an earlier bond issue on the basis that it does not want to distribute any further bonds that are tax-free to Jamaican Investors. It seeks to re-finance the maturing Euro200 Million issue through a European investment bank but the deal falls apart as the terms are deemed unfavourable to Jamaica. The Ministry uses the NIR to meet the payment due.
The currency comes under sustained pressure as investors consider the implications of Jamaica being locked out of the international capital markets. The BOJ pushes interest rates on its 150 day repo to 30% to encourage investors to remain in local currency. BOJ withdraws the instrument after 4 days as the currency movement slows temporarily. The NIR, while still healthy, falls from a recent high of US$1.9 Billion to $1.25 Billion. Some investors express concern by the severity of the Central Bank's action. The US$ closes at $53.74.
EVENT 7 - MARCH 2003
The month starts with sustained pressure and market imbalance as demand for currency exceeds supply. The Bank of Jamaica opts to adjust its 365 day repo to 35.95% as its preferred countermeasure. Impact on the currency market is negligible.
The six-month T-Bill hits a seven year high. Investors express concern about upcoming budget prospects given the significant rise in domestic interest rates and the high cost of internal debt. There are no statements of substance from any public official. The US$ closes at $56.24.
EVENT 8 - APRIL 2003
The Minister presents the new budget's expenditure to the country. The Finance Ministry is allocated most of the new budget's increase to service higher interest costs. Some commentators express the view that the GoJ lacks the political will to cut expenditure.
Media reports suggest that a public sector group's compensation currently under review indicates salary increases of 16%, twice the rate of inflation, despite wide calls for belt-tightening. Currency depreciation accelerates and the Central Bank indicates that it also is awaiting the Minister's tax package before considering any adjustments.
Credit Sights, an institutional credit analysis agency, issues a negative report on Jamaica and blindsides the local financial market. The report expresses concerns regarding the Government's political will to cut costs, reduce the fiscal deficit, the country's overall debt levels and the Government's ability to refinance its debt obligations maturing this year. Global bond prices plunge as their recommendation is to "zero weight holdings", in common language "SELL".
The GOJ issues a press release in response to the Credit Sights report with specific statements on the deficit and primary surplus targets, and announces a US$150 million recovery in the NIR to US$1.4 billion.
The NIR improvement of US$150 million raises an interesting question. - How has the NIR increased? Could this build-up have reduced foreign exchange flows to the market and fuelled the currency depreciation? By mid-April, the US$ crosses $57, a 12% tumble this year.
SUMMARY
Investors have long known that confidence is a key ingredient in economic growth. Asset prices will rise and fall in a normal economy.
That's how markets function and adjust. However, a market filled with the fears, real or unfounded, of investors who have lost confidence in that economy can create chaos. Economies and their financial markets can therefore suffer similar fates if steps are not taken to restore and maintain investor confidence quickly. We cannot over-emphasise the importance of confidence, and how inaction or rash decisions can destroy it.
Jamaica has major problems. Some of our challenges have external catalysts, but many have been internally created, and we have all contributed in some way to the conditions that currently exist in Jamaica.
Now what are we going to do about it? Let's not waste energy or time allocating percentages of blame, its time to focus on fixing the situation.
We are optimists and agree with the statement that pessimists can only enjoy the sad pleasure of knowing that they were right, when things go wrong. We find no joy in that.
RESTORING INVESTOR CONFIDENCE
The first step to restoring investor confidence resides in the actions of each of us individually, but more importantly, in the collective leadership of this country - the Government, the Opposition and the Private Sector and the roles we play.
Clearly, the elected Government has the greatest burden. It must now focus on fulfilling its obligation to reduce its size, become efficient, operate within its resources and get on with its responsibility to educate, protect and establish an environment where businesses can thrive, create jobs, earn foreign exchange and pay reasonable taxes.
TIME FOR IMPLEMENTATION
Specifically, spending cuts and other acts of fiscal restraint are clear demonstrations of a new-found political willingness to act decisively. Let us implement the many consulting reports recommending the reorganisation of aspects of government. Additio-nal taxes on an already overburdened citizenry have to be a last resort.
The Private Sector cannot, at this time, call for spending restraint and concurrently ask the Government for spending on special interests. However, incentives to encourage new investments and create jobs make sense.
These actions are critical if confidence is to be restored quickly. The Government must be tough enough to walk the walk, deliver on its promises and we need to see evidence of meaningful successes early in this new financial year. Delays will be to our severe detriment.
The Opposition plays an equally critical role for Jamaica. Under our model, they must be in a state of readiness at all times and ready to govern. A weak Opposition is dangerous to a democracy as it allows mediocrity to prevail without the country having a credible alternative to encourage the administration in charge to consistently meet acceptable performance standards.
Finally, the Private Sector, in fact all citizens, must be fearless in our criticism when folly occurs, flowing in our praise for good programs implemented and meaningfully supportive of our political leaders in times of challenges. Administrations must understand and accept that public criticism of its inaction should not be interpreted as anti-Government or politically motivated. That is our role, right and responsibility. We want our leaders to succeed.
These are times of great difficulty, and the younger emerging leaders of the Government, Opposition and Private Sector must begin the process of building bridges that transcends the mistrust that currently exists if they wish to inherit a governable and growing country where the dreams and aspirations of all hard-working Jamaicans can be realised.
Jamaica, we can deal with our problems. Let's start the work today.
