By Thomas Trebat, ContributorCitigroup, the parent of Citibank Jamaica headed which is by Peter Moses, has given an overview of the Jamaican economy in light of Hurricane Ivan. Below are extracts of its assessment of Jamaica.
THE GOVERNMENT faces the difficult task of maintaining economic growth while restoring the health of the fiscal stance and reducing the external deficit.
Hurricane Ivan spared the island, but the fiscal accounts might be affected.
The economy is improving. Authorities have succeeded over the past year in stabilising the economy and restoring market confidence. The primary surplus passed from 7 per cent of GDP in fiscal year (FY) 2002/03 to 11 per cent of GDP in FY 2003/04.
Debt ratios are daunting. Total public debt is around 150 per cent of GDP in 2004.
External debt alone is 58 per cent of GDP, and total public debt service absorbs the equivalent of at least 40 per cent of GDP in 2004.
The Jamaican Government started an IMF staff-monitored programme (SMP) in 2000, but the programme was suspended in March 2003, with the deterioration of fiscal indicators. Since then, Jamaica has maintained bilateral conversations with the IMF, but currently has no formal agreement with it.
The social safety net should be strengthened to mitigate the short-term social impact of the ongoing fiscal adjustment and related reforms.
HURRICANE IVAN UPDATE
A better than expected scenario appears to have taken place as the worst part of Hurricane Ivan turned away from Jamaica this past weekend. The country nevertheless suffered significantly. According to press sources, power generation is down, and communications are limited.
Sixteen people reportedly died in the storm, and there are apparently large numbers of homeless. The costs of the tragedy, both human and material, have yet to be tabulated. Prime Minister P.J. Patterson reportedly declared a state of emergency over the weekend, which allows the Government to more effectively address law and order issues and disaster relief.
According to press accounts, the last time a state of emergency was declared was in 1988, in the context of Hurricane Gilbert, which left 45 dead and which cost a reported $800 million. Damage sustained this past weekend appear to be significantly less than in 1988. Also, the key tourism industry appears to have gone unscathed.
OVERVIEW OF THE JAMAICAN BOND MARKET
Jamaica is rated B1 by Moody's (stable outlook) and B by S&P (negative outlook)
Global bonds are the most common securities and represent over 40 per cent of the total external public debt
The public financing needs for the 2004/05 fiscal year (which ends in March 2005) approved in the budget are about US$ 2,500 million (28.0 per cent of GDP) of which US$ 925 million would be covered with new external borrowing.
RECENT TRENDS IN THE JAMAICAN ECONOMY
After a failure to achieve the fiscal deficit because of election-related spending, the Jamaican/US dollar exchange rate depreciated rapidly in the first half of 2003 before stabilising toward the end of the year. In the process, domestic interest rates skyrocketed, leading to further fiscal deterioration.
In general, authorities have succeeded over the past year in stabilising the economy and restoring market confidence. The primary surplus passed from 7 per cent of GDP in FY 2002 03 to 11 per cent of GDP in FY 2003/04.
A primary surplus of this magnitude represents one of the highest fiscal efforts in the emerging markets.
The fiscal deterioration of FY 2002/03 restricted temporarily Jamaican access to international capital markets.
CITIGROUP GLOBAL MARKETS
A well-accepted budget presentation allowed the Government to reopen its 2017 Eurobond in April 2004, raising US$125 million of the intended US$450 million for the FY 2004/05.
Jamaica issued a euro-denominated bond in the amount of EUR$200 million in July 2004.
Increasing inflationary pressures appeared in 2003 because of the exchange rate depreciation, tax changes, higher international oil prices, mounting domestic transportation costs and growing wages.
In response, the central bank initially tightened monetary policy in the first half of 2003 and then reduced interest rates in the second half of 2003. During 2004 interest rates continued to decline.
New inflationary pressures are related to temporary price increases in grains (rice, corn, and wheat) and to continued higher oil prices. We are forecasting inflation of about 13 per cent in 2004.
While still mediocre, economic growth in 2003 (2.1 per cent) was the highest in the last decade. Driven by the external sector (e.g., mining products and tourism), growth in 2004 could exceed 2 per cent.
Despite higher exports, the trade balance deficit will increase moderately in 2004. Increased transfers from abroad and a steady flow of FDI have helped to maintain foreign reserves at about $1.2 billion.
Total public debt will be around 150 per cent of GDP in 2004. External debt is 58 per cent of GDP, and total public debt service will mount to at least 40 per cent of GDP in 2004. Banks and local financial institutions are among the principal holders of the public debt.
KEY ECONOMIC RISK FACTORS
The very high level of public debt can be solved in the long run only through a sustained fiscal effort and increased economic growth.
Overall macroeconomic performance will be affected by the evolution of international interest rates and oil prices.
The external public debt has amplified the vulnerability to exchange rate pressures, a fact that has affected monetary policy decisions as well as the debt burden itself. If the exchange rate weakens, authorities will hike interest rates aggressively.
The IMF has agreed in broad terms with the stabilisation policy applied so far. However, according to the latest (August) IMF mission report, structural reforms are needed to accomplish fiscal policy goals. It agrees with authorities' plan for a major tax reform, but also suggested the need to improve tax administration and the public expenditure management system, as well as to rationalise government employment. It also recommended a greater flexibility in the management of the exchange rate.
The government expects to reduce the fiscal deficit to the 3 per cent 4 per cent of GDP range for FY 2004 05 and to achieve a balanced budget target for FY 2005 06. The authority's fiscal goals imply the achievement of a 14 per cent of GDP primary surplus over the medium term. The authorities have spoken of the objective of reducing the public debt ratio to about 100 per cent of GDP by FY 2008 09.
As the capacity to increase taxes is reduced, adjustments should focus on restraining discretionary spending and lower interest rates.
See part II next week
