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Keith Collister
Friday, January 04, 2008
Looking ahead, it will be very challenging to achieve single-digit inflation in the first half of 2008, although prospects should improve in the second half of the calendar year.
New Finance Minister Audley Shaw recently projected that this year's fiscal deficit will be 5.5 per cent of gross domestic product; he will probably seek to cut the deficit in half next fiscal year.
In the current international environment, such a tough target will require a combination of cheaper multilateral financing, control of the wage bill, cauterising the losses of the off-budget entities and substantive tax reform designed specifically to reverse the increase in the informal economy.
The government appears to have the political will to achieve the three latter objectives, whilst they appear to have already got commitments for at least US$200 million in multilateral financing already, a large part of 2008's external financing requirement.
The recent strengthening of the Jamaican dollar (and the local stock market) suggests investor confidence appears to be improving, helped by inflows from a strong tourism winter season and the prospect of the Lascelles buy out on the stock market.
The biggest short-term domestic risk to confidence and the economy (and a key concern of the IMF) is the likely collapse of some or all of the "schemes", as the game of investment "musical chairs" leaves most investors without a seat. This is likely to have a negative impact on consumption and housing in the short term, as well as being very unfortunate for individual investors, although its medium to long-term impact should be limited as the formal local financial system should be relatively unaffected.
Growth prospects hampered by 2007 shocks
The IMF projects that the Jamaican economy will grow at the same rate of two per cent in 2008 as the US economy. This is only a slightly more than the meagre 1.4 per cent that they project for Jamaica in 2007, and over two per cent below the 3.5 per cent that their sister organisation the World Bank projected for Jamaica in 2007.
Whilst much of 2007's disappointing growth performance is due to the negative third quarter growth from Hurricane Dean, Jamaica would still have missed the Ministry of Finance's economic growth projection of three per cent even without Dean's impact.
The IMF's relatively conservative forecast primarily suggests that they see Jamaica as having a greater degree of synchronisation with the US economy than in the past (a slowdown would negatively impact tourism and remittances), and that some negative weather related impact is almost guaranteed for the Jamaican economy. It may also reflect an implicit assumption that economic reform would continue at the glacial pace of the past two years.
Inflation
As occurred in 2005, external factors, namely a combination of bad weather and a major energy shock sharply increased inflation. Jamaica's Central Bank now projects double digit inflation of 12 to 13 per cent for the fiscal year, or approximately double the seven per cent that was projected in April's budget. This target unfortunately appears very realistic, as the price of oil has breached the psychologically important US$100 mark, with some projecting it could easily rise up to another 20 per cent further.
By the second half of 2008, the combination of the impact of a slowdown in the world economy on the price of oil and the pass through of higher "Dean related" local agriculture prices should allow a fall in inflation, although the price of key food commodities such as corn and wheat may remain high.
The Fiscal Situation, Interest Rates and the Dollar
The two main 'domestic' risks for 2007 - namely the possibility of a prolonged election campaign and an irresponsible 'election' budget - once again threatened Jamaica's hard won 'relative' macroeconomic stability in 2007.
The twin consequences of the prolonged campaign and fiscal irresponsibility unsurprisingly impacted the dollar negatively in the second half of the year, as well as being a contributing factor to higher domestic interest rates.
The biggest economic challenges for Jamaica immediately after the election was the much higher than planned budget deficit. With previously unbudgeted expenses of around two per cent of GDP, the fiscal deficit had appeared likely to reach nearly 7 per cent of GDP, compared with an original deficit target of 4.5 per cent of GDP for the fiscal year. It should be noted that the only slightly higher fiscal deficit in the 2003 "run wid it" budget of 2003 was among the major reasons for the collapse of the Jamaican dollar at that time. The fiscal overrun was also one of the key reasons for the pressure on the Jamaican dollar in the two months immediately after the election.
In the December issue of the leading regional investment magazine Latinfinance, former Finance Minister Omar Davies argued that the issue of the fiscal deficit was receding in importance compared to the significant other problems Jamaica faces. He noted that Jamaica's challenges included the effect of higher prices for oil and foodstuffs on the balance of payments and domestic prices, and that the virtually continuous rains will have led to worse damage, particularly to roads, than Hurricane Dean.
For Davies, the expiration of a memorandum of understanding with the unions next March raises "a big question as to what the wage settlement should be" in next year's budget. He adds "The outstanding issue of raising the income tax threshold will also have to be dealt with,".
US economic outlook key external risk
In their World Economic Outlook (WEO) issued in October, the IMF forecast only a mild slowdown in world economic growth from the over five per cent expected for 2007 to 4.75 per cent in 2008.
This optimistic October forecast was despite the fact that the IMF recognised that the risks, which included oil prices, housing and the financial sector, were clearly tilted to the downside.
In common with most commentators, the IMF forecast for Jamaica's economic growth does not assume a US recession. The key is whether the American consumer stops spending, as he potentially loses not just his house, but his car and credit cards if the credit crunch continues as expected.
Whilst a shallow US recession may not have a much greater impact than the current expected US "growth slowdown" on the Jamaican economy (there may even be offsetting benefits from lower interest rates and oil prices), a more severe recession could slow the economy to a standstill through its impact on tourism and even remittances.
The only offset to such a grim scenario would be if it underestimates the ability of the new government to achieve faster economic reform and a greater level of foreign direct investment.
Friday, January 04, 2008
Looking ahead, it will be very challenging to achieve single-digit inflation in the first half of 2008, although prospects should improve in the second half of the calendar year.
New Finance Minister Audley Shaw recently projected that this year's fiscal deficit will be 5.5 per cent of gross domestic product; he will probably seek to cut the deficit in half next fiscal year.
In the current international environment, such a tough target will require a combination of cheaper multilateral financing, control of the wage bill, cauterising the losses of the off-budget entities and substantive tax reform designed specifically to reverse the increase in the informal economy.
The government appears to have the political will to achieve the three latter objectives, whilst they appear to have already got commitments for at least US$200 million in multilateral financing already, a large part of 2008's external financing requirement.
The recent strengthening of the Jamaican dollar (and the local stock market) suggests investor confidence appears to be improving, helped by inflows from a strong tourism winter season and the prospect of the Lascelles buy out on the stock market.
The biggest short-term domestic risk to confidence and the economy (and a key concern of the IMF) is the likely collapse of some or all of the "schemes", as the game of investment "musical chairs" leaves most investors without a seat. This is likely to have a negative impact on consumption and housing in the short term, as well as being very unfortunate for individual investors, although its medium to long-term impact should be limited as the formal local financial system should be relatively unaffected.
Growth prospects hampered by 2007 shocks
The IMF projects that the Jamaican economy will grow at the same rate of two per cent in 2008 as the US economy. This is only a slightly more than the meagre 1.4 per cent that they project for Jamaica in 2007, and over two per cent below the 3.5 per cent that their sister organisation the World Bank projected for Jamaica in 2007.
Whilst much of 2007's disappointing growth performance is due to the negative third quarter growth from Hurricane Dean, Jamaica would still have missed the Ministry of Finance's economic growth projection of three per cent even without Dean's impact.
The IMF's relatively conservative forecast primarily suggests that they see Jamaica as having a greater degree of synchronisation with the US economy than in the past (a slowdown would negatively impact tourism and remittances), and that some negative weather related impact is almost guaranteed for the Jamaican economy. It may also reflect an implicit assumption that economic reform would continue at the glacial pace of the past two years.
Inflation
As occurred in 2005, external factors, namely a combination of bad weather and a major energy shock sharply increased inflation. Jamaica's Central Bank now projects double digit inflation of 12 to 13 per cent for the fiscal year, or approximately double the seven per cent that was projected in April's budget. This target unfortunately appears very realistic, as the price of oil has breached the psychologically important US$100 mark, with some projecting it could easily rise up to another 20 per cent further.
By the second half of 2008, the combination of the impact of a slowdown in the world economy on the price of oil and the pass through of higher "Dean related" local agriculture prices should allow a fall in inflation, although the price of key food commodities such as corn and wheat may remain high.
The Fiscal Situation, Interest Rates and the Dollar
The two main 'domestic' risks for 2007 - namely the possibility of a prolonged election campaign and an irresponsible 'election' budget - once again threatened Jamaica's hard won 'relative' macroeconomic stability in 2007.
The twin consequences of the prolonged campaign and fiscal irresponsibility unsurprisingly impacted the dollar negatively in the second half of the year, as well as being a contributing factor to higher domestic interest rates.
The biggest economic challenges for Jamaica immediately after the election was the much higher than planned budget deficit. With previously unbudgeted expenses of around two per cent of GDP, the fiscal deficit had appeared likely to reach nearly 7 per cent of GDP, compared with an original deficit target of 4.5 per cent of GDP for the fiscal year. It should be noted that the only slightly higher fiscal deficit in the 2003 "run wid it" budget of 2003 was among the major reasons for the collapse of the Jamaican dollar at that time. The fiscal overrun was also one of the key reasons for the pressure on the Jamaican dollar in the two months immediately after the election.
In the December issue of the leading regional investment magazine Latinfinance, former Finance Minister Omar Davies argued that the issue of the fiscal deficit was receding in importance compared to the significant other problems Jamaica faces. He noted that Jamaica's challenges included the effect of higher prices for oil and foodstuffs on the balance of payments and domestic prices, and that the virtually continuous rains will have led to worse damage, particularly to roads, than Hurricane Dean.
For Davies, the expiration of a memorandum of understanding with the unions next March raises "a big question as to what the wage settlement should be" in next year's budget. He adds "The outstanding issue of raising the income tax threshold will also have to be dealt with,".
US economic outlook key external risk
In their World Economic Outlook (WEO) issued in October, the IMF forecast only a mild slowdown in world economic growth from the over five per cent expected for 2007 to 4.75 per cent in 2008.
This optimistic October forecast was despite the fact that the IMF recognised that the risks, which included oil prices, housing and the financial sector, were clearly tilted to the downside.
In common with most commentators, the IMF forecast for Jamaica's economic growth does not assume a US recession. The key is whether the American consumer stops spending, as he potentially loses not just his house, but his car and credit cards if the credit crunch continues as expected.
Whilst a shallow US recession may not have a much greater impact than the current expected US "growth slowdown" on the Jamaican economy (there may even be offsetting benefits from lower interest rates and oil prices), a more severe recession could slow the economy to a standstill through its impact on tourism and even remittances.
The only offset to such a grim scenario would be if it underestimates the ability of the new government to achieve faster economic reform and a greater level of foreign direct investment.