Keith Collister, Contributor
BULLOCK
THE GOVERNMENT formally abandoned its balanced budget target for this fiscal year in a presentation to international investors at the Bear Stearns investment conference held in Miami on Monday and Tuesday.
Financial Secretary Colin Bullock, who manages the Ministry of Finance and Planning, advised instead that the new target was for a fiscal deficit of two per cent of GDP. While Minister of Finance and Planning, Dr. Omar Davies had previously described the achievement of the target this year as "challenging", this is the first official public recognition by the Government that the fiscal target would not be met this year.
Perhaps more surprising, was that the achievement of the balanced budget target was not pushed back into the next fiscal year, but the date for its achievement has been delayed until the year after. At the same conference, the Government projected the deficit for 2006/2007 to be one per cent of GDP, with the balanced budget target only projected to be achieved in 2007/2008.
ADDITIONAL SPENDING
The next fiscal year could well be an election year, and as a consequence it is likely that the Government would want to leave itself some room for additional spending during that period. Moreover, the end of the Memorandum of Understanding with the unions in March leaves them looking to 'catch up' at least partially their estimated loss of nearly 30 per cent in purchasing power.
Finally, some analysts believe a combination of higher-than- projected inflation and the current high degree of political uncertainty make it very difficult for the central bank to lower interest rates much further until inflation falls into single digit levels and the current political uncertainty is reduced.
The more conservative one per cent budget deficit projection for the next fiscal year may therefore simply reflect the authorities' view that they will not be able to achieve much further savings in interest costs at this time.
The new two per cent deficit target for the current fiscal year is in line with some recent estimates for the projected fiscal deficit such as those by leading international investment banks such as Bear Stearns and Morgan Stanley. The view that the Government would miss the balanced budget target has been accepted by the international capital market from late last year, when the bond prices of Jamaica's international bonds weakened as international investors factored this into their view on the appropriate value for Jamaican paper. Perhaps as important, this may also have been factored into the local market, which saw some exchange rate weakness over a similar period.
In what could be described as a 'Bear Stearns' effect, Jamaican Eurobonds rallied strongly in the first half of this week. International investors, having already factored in the fact that Jamaica wouldn't achieve the balanced budget target, appear to believe the two per cent deficit figure to be highly credible.
