Keith Collister, Business Writer
The World Bank recently projected growth of 3.5 per cent in 2007 for Jamaica, following on the 3.0 per cent estimate for 2006.
Jamaica has not seen growth at those levels in a long time, and the forecast for 2007 clearly incorporates some major assumptions for next year, both local and global.
The Jamaican economy is highlighted by high levels of economic uncertainty, making the perilous profession of economic forecasting even more dangerous in Jamaica's case.
Nevertheless, a look at some of the key economic and political factors should allow us to form some likely scenarios of what to expect in 2007.
The World Bank is not, it must be noted, forecasting the long awaited take off of the Jamaican economy, defined here as GDP growth in the 6-7 per cent range, or approximately double what it has projected.
Unsurprising
This is unsurprising as Jamaica still has some very serious reform challenges if it is to reach such a level of growth.
Most particularly, Jamaica urgently requires a pro-growth tax system if it is to achieve the twin goals of attracting foreign direct investment in 'new emerging' industries, targeting 'export industries' in particular, and creating a mass migration of local small and medium sizes businesses into the formal sector.
Jamaica has had bauxite and tourism since the 1950s, and the fact that 50 years on these remain its leading export sector is indicative of the problem of achieving take-off.
Tourism had an excellent performance in 2006, but the passport issue - Americans are now required to re-enter their country on a passport - and the return of Mexico to the market is likely to make it difficult to repeat in 2007.
In fact, other than the creation of a now failing garment sector in the late 1980s - an unfortunate development as this sector has typically led the industrialisation of developing countries since the first industrial revolution in Britain - and some so far limited IT outsourcing, no large scale export industries have been created in Jamaica in 50 years.
Moreover, as reported in the media and discussed in high level business circles, the Jamalco expansion expected to drive the second leg of the current economic recovery now appears to have been postponed (if not cancelled) due to lack of the promised cheap energy from Trinidad.
This is highly unfortunate, as the China-driven world commodity upswing may peak temporarily over the next couple of years.
Economic growth of 3.0 per cent (and informally even higher rates) were projected by the Government for both 2004 and 2005, but were derailed by largely weather related shocks.
The better growth performance of the economy in 2006 than 2005 appears to have largely been driven by the absence of these shocks, and the local economy's so far successful adjustment to much higher energy prices, particularly oil. The combination of weather and energy shocks led to high double digit inflation that peaked at nearly 20 per cent on a 12-month rolling basis in 2005, and it is the sharp decline in inflation to mid single digit levels by the end of 2006 that has been a key component of restoring Jamaican macro-economic stability, critically allowing the important trend of cutting domestic interest rates to begin again in the latter part of this year.
'Bank credit'
This trend of falling interest rates and the consequent real increase in an economies growth fuel "bank credit" is critical to an improved growth outlook.
Unfortunately, a significantly higher growth rate than the marginal increase to 3.5 per cent for 2007 would require both single digit 'policy' interest rates and a significant contraction in banking spreads to achieve domestic commercial lending rates capable of accelerating growth, which currently appears unlikely.
Lower policy rates would require a faster than planned contraction of the budget deficit, while the reduction in spreads would require much greater competition in the commercial banking sector, which is mainly a function of new entrants.
It therefore appears the risks of a growth disappointment in 2007 are considerable, while growth beyond 3.5 per cent is very limited.
These downside risks include the now well known risks of weather and a geopolitically driven rise in oil prices to levels exceeding the 2006 high of US$78.40, for which the Venezuela agreement is only a partial cushion.
Assuming luck with the weather and oil, the base case for 2007 is therefore a slightly improved version of 'more of the same' - agreeing with the World Bank's forecast of moderate growth of 3.5 per cent of GDP, along with the expectation of single digit inflation, depreciation of the Jamaican dollar slightly below the rate of inflation, with a very slight improvement in the targeted deficit as a percentage of GDP to 2.0 per cent in the 2007/08 budget.
This assumes the current budget deficit of 2.5 per cent will be missed by a small margin to come in a little under 3.0 per cent, implying that capital expenditure which is now below budget will ramp up in the final quarter of the current fiscal year.
The possibility of a prolonged election campaign, in the context of a tight race, could become very negative for the economy depending on the tactics used by the respective political parties.
In addition, an irresponsible 'election' budget, as seen in previous election years, would also be a threat to hard won 'relative' macroeconomic stability.
The latter two 'domestic' risks are not high probability, that is greater than 50 per cent, if only because today's level of media transparency, both locally and internationally, would lead to a quick punishment in both the financial and political marketplace.
The wholesale abandonment of the balanced budget objective, sought at high cost since 2002, would probably be punished both in the international and domestic financial markets, as well as politically, as the consequences of fiscal irresponsibility - for example, its potential impact on the dollar - are now much better understood by the general population.
Main risks
The main risks to this forecast are external. An unexpected tightening of the global financial markets would affect our ability to finance our relatively high 2007 external debt payments, but is a relatively low risk due to Jamaica's high level of 'self insurance' in the form of foreign exchange reserves.
The main concern is a sharper than currently expected downturn in the U.S. and subsequently the global economy. Jamaica's main export industries, bauxite and tourism, are highly sensitive to the world (particularly U.S.) economic cycle and, badly managed, a global downturn could also significantly lower foreign direct investment prospects. However, the main effects of such a downturn would probably not occur until the second half of 2007, and if Jamaica was able to use this downturn as an opportunity to lower domestic interest rates, it would probably have only a marginally negative impact on the forecast for the local economy in 2007.
keithcollister@cwjamaica.com
