Keith Collister, Financial Gleaner Writer
Dr. Carl Ross, senior managing director and head of emerging markets fixed income research at Bear, Stearns and Co. - RUDOLPH BROWN/CHIEF PHOTOGRAPHER
BEAR STEARNS, the American investment house that has been Jamaica's lead broker in the international money market in recent years, is cautious about Government's growth projections, causing the company to maintain its 'Single B' rating on the country's sovereign bonds.
Jamaican bond prices have fallen in recent months, making them the cheapest on the market at this time, with yields rising above nine per cent.
But Bear Stearns, in its June 29 market report on Jamaica, said that it decided not to upgrade the country's bonds "in the current climate when countries with current account deficits are out of favour, and the hurricane season is upon us".
In fact, said Bear Stearns, this relative cheapness provided "Some cushion for the bonds in the current environment, which is why we are comfortable with a market perform recommendation."
RESEARCHERS NOT CONFIDENT
But part of Bear Stearns' problem was that its researchers were not confident, although they concede that it is possible, that the Government can deliver on the three to four per cent growth promised by Finance Minister Omar Davies in his budget in April.
"The past several years have been extremely disappointing in terms of growth outcomes," said the Bear Sterns researchers, led by senior managing director, Dr. Carl Ross. Last year the economy grew a mere 1.5 per cent and the first quarter outturn, year-over-year, was a disappointing 1.4 per cent.
Added the report: "We are still awaiting the growth take-off that had been expected to come along with the impressive investment cycle in Jamaica, but it has not materialised, and at this point there would appear to be more headwinds against higher growth than tailwinds."
Bear Stearns noted some sectors, primarily the externally-related ones such as tourism and bauxite/alumina were doing well, while the domestic economy (retailing, financial services, agriculture) has been relatively weak.
The investment bank listed the obstacles to higher growth as including the cement shortage that has affected the construction industry since March, a hurricane season which forecasters say could be worse than normal, high oil prices as well as stock market weakness that should affect consumer and business confidence.
A new report published on Tuesday showed that second quarter business confidence had in fact fallen sharply by 20 per cent, but consumer confidence set another record.
POSITIVE 'TAILWIND'
The main positive 'tailwind' is that various large-scale investment projects concentrated in the tourism, bauxite, and public infrastructure (roads, ports and airports) could add up to 25-40 per cent of gross domestic product (GDP) in value over the next few years.
However, Bear Stearns cautioned: "We would have thought that spending on projects already undertaken would have shown up in the national accounts, but it has not really had an impact on the headline numbers as reported."
In Bear Stearn's view, fiscal policy continued to be dominated by the need to reduce the budget deficit in order to improve Jamaica's debt dynamics. The fiscal deficit of 3.3 per cent of GDP in fiscal year 2005/2006 was an improvement over the 4.8 per cent GDP deficit of the previous year, but disappointing relative to expectations of a balanced budget. This failure "was due mainly to higher-than-planned expenditures across the board".
While the Government blames most of the deviation on weather-related shocks, Bearn Stearns noted that "actual revenues outperformed the budget by a small but positive margin".
Tax revenues were expected to grow by 1.4% of GDP, or 20 per cent in nominal Jamaican dollar terms this fiscal year, which the analysts said was significant, "as there are no tax increases in the budget, a welcome policy for a country that is trying to grow".
They point out that increased tax receipts were expected to come from the tax compliance measures that have been adopted over the past six to eight months. These were having a positive impact on collections, with April tax revenues up 21 per cent compared to the previous year, followed by a similarly good performance in May.
DEBT INTEREST BURDEN HUGE BUT DECLINING
External and domestic interest cost is budgeted at 12.8 per cent of GDP (42 per cent of Government revenue) for 2006/07, down from the peak of 17.8 per cent in fiscal year 2003/04 when the Bank of Jamaica raised interest rates to stabilise the currency.
The bulk of the savings are coming from reductions in the domestic debt burden as the BOJ continues to lower interest rates.
Continued interest savings depend on the ability of policymakers, mainly the Bank Of Jamaica (BOJ), "to delicately manage the multiple goals of financial system soundness, all in a world in which liquidity may have peaked and the general level of interest rates is rising."
Over half of Jamaica's domestic debt is floating and therefore very vulnerable to a sudden spike in interest rates, the Bear Stearns analysts said.
They believe that the BOJ will continue to place a high premium on stability in the foreign exchange market as the exchange rate is an important barometer of investment confidence.
With ample reserves, the BOJ should be able to credibly adhere to this objective, they said. "The exchange rate is also an important variable for the credit outlook. A major devaluation must be avoided because of the high burden of external debt, and excessive volatility must be avoided because this could lead to higher domestic interest rates, which could also create a sovereign credit problem."
