Keith Collister, Contributor
SIMPSON MILLER
THE INTERNATIONAL environment of ample global liquidity has allowed Caribbean countries like Jamaica to restructure their debt, refunding at lower interest rates, and reducing the financial impact of hurricanes and high oil prices below what they would otherwise have been, argues Bear Stearns economist Carl Ross.
His comments provide the critical economic backdrop that will determine our future Government's (post the obligatory Cabinet reshuffle) room for economic manoeuvre. He was speaking at a seminar last week put on by GraceKennedy's securities subsidiary First Global Financial Services.
Copious global liquidity has allowed higher risk, lower rated Caribbean credits such as Jamaica to continue to outperform more highly rated countries in the region, partly as the interest rates of investment grade countries such as Trinidad are already relatively low. However, he argued that some international investors believe that this abundant global liquidity is masking severe cyclical and structural weaknesses in the Caribbean, which include the impact of oil prices, unsustainable debt burdens, large current account deficits, fiscal deficits, and the risks of relatively undiversified economies, all issues relevant to Jamaica.
THE IMPLICATIONS OF MRS. SIMPSON MILLER'S VICTORY
This analysis is particularly important in the light of Portia Simpson Miller's victory, which has been characterised by UWI Professor Brian Meeks as a 'grassroots upheaval'. For most of the past decade, due to our precarious financial position where we were almost always on the knife-edge of debt sustainability, Jamaica has been forced to run primary surpluses (i.e. excluding debt interest) of over 10 per cent of GDP to avoid defaulting on its extremely high debt. This huge fiscal effort has come at a high social price, with the result that non-discretionary spending e.g. excluding debt service and wages, is a very small portion of the budget.
Consequently, the ability of the new prime minister to implement a more compassionate and caring agenda, and fulfil the obviously high (and deserved) expectations for greater social spending to meet the huge current needs of the society, will be extremely difficult to satisfy.
THE EXTERNAL CONSTRAINTS
The international financial markets' current expectation is for a narrowing, not a widening fiscal deficit, and this expectation of continued fiscal restraint was one of the key factors that allowed Jamaica to issue a 30-year Eurobond last week, the country's longest ever international maturity. The other main factor being ample international liquidity previously mentioned. According to one New York hedge fund analyst, referring to Jamaica's international bond prices, there has been no reaction whatsoever so far to Saturday's results. "I don't even think it has been widely reported in New York or London. No one has even come out with a report saying it is good or bad and why. Jamaica went up with the market early in the week, was a little weaker with the market on Tuesday and is somewhat better yesterday and today."
It appears, therefore, that as long as the current Minister of Finance, Omar Davis, stays in place, there is currently no expectation of any significant change in economic policy in Jamaica by international bondholders. Instead, international investors appear to believe his statement that there will be no change in policy on his watch, and that, in fact, he will continue as Minister of Finance for the foreseeable future. This confidence is important as our very high debt gives us very little fiscal leeway, and we surely want to avoid a repeat of 2003.
WHAT CAN THE NEW PRIME MINISTER DO DIFFERENTLY ECONOMICALLY?
As it appears her victory will not be able to loosen significantly the current fiscal straightjacket, the new prime minister should go for growth, seeking to accelerate change in the areas she can control. For example, she can seek to accelerate and prioritise improvements in legislation and regulation, lead from the front in terms of attracting even more foreign investment, and galvanise local investors by making them believe that the Jamaican government truly cares about their typically much smaller projects.
TAX POLICY
In terms of mobilising both foreign and local investors, the issue of tax policy will be absolutely critical. Incentives for foreigners, often giving them a corporate tax rate of effectively as low as zero per cent, are a huge contrast to a dividend paying small and medium size (SME) Jamaican business, who is not only obligated to pay a corporate tax rate of a third of their profit, but pay an additional 25 per cent on any dividend they pay themselves, or an effective overall tax rate of about half their income. Their situation worsens when one looks at the recent proposal to curb their ability to claim tax losses, which totally ignores, to name only one area, its affect on rural agriculture (an area targeted to receive attention in the new PM's speeches). Most permanent tree crops, not to mention forestry, ackee etc., all have growing cycles exceeding the initially proposed limit period for tax losses of five years, which means farmers don't put anything in their pocket until well beyond that period. This is particularly problematic as it is likely that most job creation can only come from urban and rural SME's.
SOCIAL MOBILISATION
One area in which the new PM could make a huge difference is in pursuing a 'Jamaica First', or even better a 'One Jamaica'
policy. I believe the new PM is regarded favourably by Jamaicans of both parties, which gives her the political capital to potentially reduce the political and social divisiveness in Jamaican society, the demand for which I believe is one key factor in her victory. There are a number of initiatives which she can build on - the partnership for progress and civic dialogue
initiatives for example - that would avoid starting from scratch in order to achieve a true social partnership.
