Keith Collister, Contributor
Dr. Carl Ross, senior managing director and head of Emerging Markets Fixed Income Research at Bear, Stearns and Company. - RUDOLPH BROWN/CHIEF PHOTOGRAPHER
JAMAICA RAN a fiscal deficit for the month of August of $938.4 million Jamaican dollars, slightly below the programmed deficit for the month of $1,380.8 million.
This encouraging trend, however, masked a continued underperformance in the area of tax revenue. Collections of $12.7 billion for the month of August were below the over $13.5 billion budgeted to be collected. In fact, tax revenue is over $5.2 billion below target for the first five months of the current fiscal year. The government therefore appears to be succeeding in minimising the deviation from its budget targets for the first five months of the fiscal year of nearly $1.3 billion mainly through cutting $3.9 billion from its planned expenditure.
REVENUE DISAPPOINTMENT
While they have managed to contain the expansion in the fiscal deficit from the underperformance in tax revenues so far, according to Dr. Carl Ross of leading investment bank Bear Stearns, this is somewhat of a "good news, bad news" story.
"The good news is that the emphasis on expenditure restraint, and therefore the attempt to achieve the balanced budget target is still in place. The bad news is that tax revenues should go up in line with the increase in nominal GDP (real growth plus inflation), but the recent inflation surprise (higher than expected inflation) has not translated into a positive revenue surprise for the Government. Furthermore, the inflation surprise could lead to increased pressures on spending down the road".
The greatest source of revenue disappointment was local GCT (general consumption tax), which was over $2.4 billion below its $13.58 billion target. In addition, GCT on imports of approximately $7.63 billion was nearly $1.36 billion below target.
The underperformance of GCT is particularly striking when it is considered that GCT was increased by 1.5 per cent from 15 per cent to 16.5 per cent at the last budget. According to one leading local financial analyst, tax revenues from this source were reasonably projected by the Ministry of Finance to grow approximately 20 per cent, reflecting the then single digit estimate of inflation and the increase in the rate of GCT.
While it is still possible that the discrepancy merely reflects timing differences associated with the tax changes, anecdotal evidence from the membership of the Chamber of Commerce is reporting slow sales over the period, partially due to weather related reasons, but also possibly reflecting diminished purchasing power. The release of the JCC's business and consumer confidence numbers next week Tuesday should provide a more definitive, whilst still preliminary, view of whether the underperformance in this area reflects an economic slowdown.
On the cost side, the government was however able to reduce nearly all categories of expenditure with the notable exception of domestic interest rates for the fiscal period April to August. Wages and salaries at $25.8 billion were $634 million below the budget of $26.4 billion for the period. Jamaica's $9.46 billion in external debt interest costs over the period represented savings of $434 million, presumably from the faster than anticipated replacement of higher cost international debt with lower coupon bonds.
Unfortunately, the critical area of domestic interest costs was $255 million higher than budgeted. This suggests that having been ahead of target in terms of interest rate reductions in the first quarter of the fiscal year, we may now be slightly behind the originally programmed reduction in domestic interest rates. Whilst this halt to the decline in domestic interest rates is in no way surprising because of recent higher than anticipated inflation, the critical importance of lower interest costs in meeting the balanced budget target overall logically suggests the Government would again look at borrowing more internationally than budgeted, substituting cheaper external financing for higher domestic borrowing as it did last fiscal year. In fact, market rumours are that the Jamaican Government has already asked half a dozen major Wall Street banks to submit proposals for a new Eurobond deal.
Assuming the authorities are in fact considering an international debt deal however, their timing may be poor, as I believe the 16-month rally in emerging-market debt, which drove average spreads on developing-nation bonds to their narrowest ever level, may have ended for the moment. At the low on Monday, investors demanded 2.41 percentage points more yield on average to hold emerging-market bonds rather than comparable maturity U.S. Treasuries, according to JPMorgan Chase & Co.'s EMBI+ Index, in which Jamaican bonds are represented. A vicious emerging market bond sell off began on Tuesday with the release of the Institute of Supply Management (ISM) data, with the result that the spread has risen for a third day. The good news for Jamaican bond holders is that despite this negative international environment overall "Jamaica Global bonds continue to defy the laws of nature ... despite ongoing concerns in the world, Jamaica's continued premiums are the sole result of supply and demand locally", according to Oppenheimer bond trader Greg Fisher.
