By Deon McLennon, ContributorTHE WORLD, including Jamaica, is digging through conflicting pieces of economic data, trying to decipher growth prospects and the possibilities for faster recovery. With the United States representing 45 per cent of global GDP, its financial markets currently mirror the uncertainty. Rising unemployment, record high consumer debt levels, a fiscal deficit equal to five per cent of GDP, a weak currency, and stock market PE ratios above 30 times earnings, all suggest caution and a slower recovery. Please note, we are talking about the U.S. economy, not Jamaica.
With falling interest rates, foreign exchange stability, a rising stock market, encouraging tourist arrivals and the possibility of three new major hotel developments in 2004, we sense that the lingering mood of uncertainty may slowly improve at home. However, escalating inflation has reared its ugly head and our balance of payments performance remain unimpressive. We believe that the Government of Jamaica's ability to raise funds internationally is critical. Successful fund-raising this year will play a key role in reducing some of the negative vibes and restoration of confidence.
1. The Bank of Jamaica (BoJ) yield at the latest six-month treasury bill auction declined by 146 basis points as the bid to offer ratio was over 3:1. BoJ's rate cut on the morning of the auction had a minor impact on the spread between the treasury bill and six-month repo, with the treasury bill yield clearing 196 basis points above the repo rate.
2. The BoJ cut its rates in late June and early July. This, in conjunction with its consistent intervention in the foreign exchange market, is helping to restore stability to the both the money and foreign exchange markets.
3. The Consumer Price Index spikes of 1.9 per cent in May and 2.5 per cent in June have not been at these levels since early 1996. For the first fiscal quarter, CPI moved 6.0 per cent. This is a cause of concern. All prices, especially food, were affected by the US dollar slide in April and May.
4. The fiscal deficit was $4.3 billion better than forecasted as revenues were $1.7 billion ahead, while expenses were $2.6 billion under budget. We expect the first quarter out-turn to remain positive, and will monitor the second quarter accounts with the expectation that rising interest rates will be offset by cost containment.
5. The Net International Reserves expectedly declined from consistent intervention by the BoJ in the foreign exchange market. The NIR remains adequate in the short term, but the Government's overseas financing later this year is critical if it is to reduce its reliance on the NIR. With US interest rates at 40-year lows, external conditions are favourable but improved fiscal performance will be a key criteria.
6. Cruise ship arrivals continue to contribute strongly to our visitor arrivals, particularly in Montego Bay where cruise ship calls were up 83 per cent. European stopover visitors continue to register strong growth, having increased by 50 per cent compared to last year. Overall, cruise ship visitors jumped 39.2 per cent, while stopovers were up seven per cent.
7. Imports grew while our exports shrank, both by 10 per cent. Remittances continue to fill the gap, rising 20 per cent to US$825 million. Travel, largely tourism receipts, improved by US$59 million from improved arrivals, helping to reduce the current account deficit.
8. U.S. deposits in the banking system rose to US$1.43 billion, an increase of US$253 million over last year.
9. The country's internal debt stood at $384 billion at May 3, up $79 billion from last year, with the higher fiscal deficit contributing to higher debt levels.
10. Our 12-month debt has remained stable as the $300 million borrowed during June of last year met maturing obligations.
Article written by Deon McLennon, Assistant Manager, Research & Analysis at Pan Caribbean Merchant Bank. Please call 9295583.
