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Can the JLP's pro-growth agenda offset the effect of a global downturn on Jamaica's economy?
By Keith Collister
Sunday, February 03, 2008
Senator Don Wehby, Minister without Portfolio in the Ministry of Finance and the Public Service, recently projected GDP growth of 2.5-3.5% in 2008, 3-4% in 2009 and 3.5-4.5% in 2010 at Bear Stearns 6th Annual Latin American and Caribbean Markets Conference in Miami, Florida.
Minister Wehby told the gathered investors to "Invest in Jamaica - a place where you can do business" as "This new administration has long term plans aimed at making Jamaica a world class business destination".
Highlighting the fact that Foreign Direct Investment (FDI) had surpassed US $500M for the past four years (2003-06: US$604.4M, US$537.8M, US$607.9M and US$805.6M), Minister Wehby singled out tourism as an area expected to post impressive growth of 10% in 2008, with the addition of over 3,000 new rooms this year, and also forecast a continued expansion of the Bauxite/Alumina industry.
However, in its just released annual report on Jamaica, leading rating agency Moody's Investors Service has warned that it may downgrade Jamaica's bond rating if fiscal slippages continue, as its current rating of Jamaica incorporates the expectation that our debt ratios would improve.
According to Moody's, its current 'B1' foreign currency bond rating for Jamaica reflects the government's strong willingness to service obligations, a proven ability to respond to exogenous shocks and a commitment to fiscal discipline.
Rating constraints unsurprisingly include Jamaica's low growth and a large public debt burden that allows very little room to absorb shocks.
Low growth
The author of the report, Moody's Vice President and Senior Analyst Alessandra Alecci, notes that 'Debt dynamics are complicated by persistently low growth, leaving the bulk of the adjustment to fiscal austerity and leaving Jamaica's fragile macro-economic equilibrium continually exposed to a variety of shocks that have the potential to further increase the government's credit risk.'
Large public sector debt burden
Concerning fiscal adjustment, Alecci notes "the consolidation has been much slower than anticipated".
She also argues that Jamaica's large public debt burden allows very little room to absorb shocks, as 'Despite modest improvements over the past few years, the size and composition of the government's debt stock leaves interest payments still very vulnerable to pressure on either the interest or exchange rate,'
Supply side measures and fiscal restraint
The Moody's report summarised the new administration's economic policy as kick-starting growth via a series of supply-side measures and fiscal restraint that would generate investment and overall greater business confidence. However, they believe the magnitude of our fiscal constraints, the unfavourable global growth outlook as well as prospects for continued very high oil prices, are important obstacles for Jamaica's small, highly indebted open economy.
At the same Bear Stearn's conference, in addition to telling investors that Jamaica was open for business, Minister Wehby outlined the new economic policy framework as prudent fiscal management to reduce the national debt, the planned implementation of a simple competitive tax system, a more efficient and diversified energy supply and the creation of a simplified business-friendly bureaucracy.
He also outlined the need for the strengthening of anti-corruption measures, a reduction in crime, a modernised labour market, supportive infrastructure, an independent Central Bank and the Government's firm intention to negotiate a social partnership between the Government, Private Sector, Trade Unions and Opposition.
Fiscal Management
Wehby has promised to get rid of supplementary budgets and loss-making entities, and is exploring the possibility of performance-based budgeting.
The FY 2008/2009 budget is built around a "strict prioritisation of government expenditure" and divestment of non-core assets, and is targeting a fiscal deficit of 4.5% of GDP, according to Wehby's presentation. The Sugar Company of Jamaica is expected to be divested by June 2008 and Air Jamaica is expected to be sold before March 2009.
Wehby is also pushing for a Fiscal Responsibility Act that would place constitutional caps on the fiscal deficit, mandating a 2/3 majority in both houses of Parliament before the cap can be exceeded.
Tax Reform
Tax reform, expected in this year's budget, will be designed to make the tax system simpler to administer and collect, more business friendly, and broaden the tax base.
Energy
Government plans to diversify Jamaica's energy sources include expanding wind and hydro power capacity, the creation of a bio-fuels market, tax incentives for energy efficient items, and continued oil and gas exploration.
Inflation
Wehby projected inflation at 10-11% in 2008, and 7-8% in both 2009 and 2010, which seems ambitious without a fall in the price of oil and other commodities e.g. corn, soybeans, and wheat.
Public Sector Wages
The recent sharp rise in inflation to double digit levels is likely to make the negotiation of a new Memorandum of Understanding (MOU 3) between the government and trade unions, intended as the starting point for a more comprehensive social partnership, extremely difficult. Moody's argues "It is important to note that given the very limited flexibility of expenditures, containing the wage bill (which represents 30% of total and 50% of primary expenditures) is key to fiscal sustainability".
Consequently, it is watching the progress of Jamaica's new attempt at fiscal consolidation closely, with particular emphasis on the wage agreement with civil servants, as "The outcome will indicate whether support for the current fiscal program is still feasible."
It will be challenging for the Government to achieved the revised fiscal deficit target of 5.5% of GDP, whilst some are likely to argue that next years fiscal deficit target of 4.5% of GDP is disappointingly gradual.
However, if the fiscal target is actually met, as opposed to continually missed as has been the case in the past, this would be a significant achievement. Moreover, Jamaica's debt has actually increased much faster (up to double) the increase in the debt due to the central government deficit because of the huge losses of the major government guaranteed enterprises. If these losses are "cauterised" as planned, that would be a truly major break with the past.
In view of all these other challenges, there is a not insignificant risk that the impact of a US recession on Jamaica's main foreign exchange earners (tourism, bauxite and remittances) could tip Jamaica into a recession. The key to whether Jamaica will be able to avoid such an economic downturn will be whether the Government can move fast enough to implement the low hanging fruit of tax reform and the numerous projects that have either not been started, or have been moving at a very slow pace, over the past several decades. The likely collapse of the various "schemes", probably impacting the Jamaican economy in the second and third quarters of this year, will compound the Government's difficulty in achieving their relatively ambitious growth target (taking into account the circumstances) for 2008.
On the positive side, US interest rates are going to continue to fall, and a slowdown in the world economy should eventually reduce oil prices (fuel imports represented a mammoth US$1.9 billion or 17.8% of Jamaican GDP in 2007).
The critical variable is probably local business confidence, whose recovery will depend on whether the Government is seen to have the ability to implement its economic programme.
By Keith Collister
Sunday, February 03, 2008
Senator Don Wehby, Minister without Portfolio in the Ministry of Finance and the Public Service, recently projected GDP growth of 2.5-3.5% in 2008, 3-4% in 2009 and 3.5-4.5% in 2010 at Bear Stearns 6th Annual Latin American and Caribbean Markets Conference in Miami, Florida.
Minister Wehby told the gathered investors to "Invest in Jamaica - a place where you can do business" as "This new administration has long term plans aimed at making Jamaica a world class business destination".
Highlighting the fact that Foreign Direct Investment (FDI) had surpassed US $500M for the past four years (2003-06: US$604.4M, US$537.8M, US$607.9M and US$805.6M), Minister Wehby singled out tourism as an area expected to post impressive growth of 10% in 2008, with the addition of over 3,000 new rooms this year, and also forecast a continued expansion of the Bauxite/Alumina industry.
However, in its just released annual report on Jamaica, leading rating agency Moody's Investors Service has warned that it may downgrade Jamaica's bond rating if fiscal slippages continue, as its current rating of Jamaica incorporates the expectation that our debt ratios would improve.
According to Moody's, its current 'B1' foreign currency bond rating for Jamaica reflects the government's strong willingness to service obligations, a proven ability to respond to exogenous shocks and a commitment to fiscal discipline.
Rating constraints unsurprisingly include Jamaica's low growth and a large public debt burden that allows very little room to absorb shocks.
Low growth
The author of the report, Moody's Vice President and Senior Analyst Alessandra Alecci, notes that 'Debt dynamics are complicated by persistently low growth, leaving the bulk of the adjustment to fiscal austerity and leaving Jamaica's fragile macro-economic equilibrium continually exposed to a variety of shocks that have the potential to further increase the government's credit risk.'
Large public sector debt burden
Concerning fiscal adjustment, Alecci notes "the consolidation has been much slower than anticipated".
She also argues that Jamaica's large public debt burden allows very little room to absorb shocks, as 'Despite modest improvements over the past few years, the size and composition of the government's debt stock leaves interest payments still very vulnerable to pressure on either the interest or exchange rate,'
Supply side measures and fiscal restraint
The Moody's report summarised the new administration's economic policy as kick-starting growth via a series of supply-side measures and fiscal restraint that would generate investment and overall greater business confidence. However, they believe the magnitude of our fiscal constraints, the unfavourable global growth outlook as well as prospects for continued very high oil prices, are important obstacles for Jamaica's small, highly indebted open economy.
At the same Bear Stearn's conference, in addition to telling investors that Jamaica was open for business, Minister Wehby outlined the new economic policy framework as prudent fiscal management to reduce the national debt, the planned implementation of a simple competitive tax system, a more efficient and diversified energy supply and the creation of a simplified business-friendly bureaucracy.
He also outlined the need for the strengthening of anti-corruption measures, a reduction in crime, a modernised labour market, supportive infrastructure, an independent Central Bank and the Government's firm intention to negotiate a social partnership between the Government, Private Sector, Trade Unions and Opposition.
Fiscal Management
Wehby has promised to get rid of supplementary budgets and loss-making entities, and is exploring the possibility of performance-based budgeting.
The FY 2008/2009 budget is built around a "strict prioritisation of government expenditure" and divestment of non-core assets, and is targeting a fiscal deficit of 4.5% of GDP, according to Wehby's presentation. The Sugar Company of Jamaica is expected to be divested by June 2008 and Air Jamaica is expected to be sold before March 2009.
Wehby is also pushing for a Fiscal Responsibility Act that would place constitutional caps on the fiscal deficit, mandating a 2/3 majority in both houses of Parliament before the cap can be exceeded.
Tax Reform
Tax reform, expected in this year's budget, will be designed to make the tax system simpler to administer and collect, more business friendly, and broaden the tax base.
Energy
Government plans to diversify Jamaica's energy sources include expanding wind and hydro power capacity, the creation of a bio-fuels market, tax incentives for energy efficient items, and continued oil and gas exploration.
Inflation
Wehby projected inflation at 10-11% in 2008, and 7-8% in both 2009 and 2010, which seems ambitious without a fall in the price of oil and other commodities e.g. corn, soybeans, and wheat.
Public Sector Wages
The recent sharp rise in inflation to double digit levels is likely to make the negotiation of a new Memorandum of Understanding (MOU 3) between the government and trade unions, intended as the starting point for a more comprehensive social partnership, extremely difficult. Moody's argues "It is important to note that given the very limited flexibility of expenditures, containing the wage bill (which represents 30% of total and 50% of primary expenditures) is key to fiscal sustainability".
Consequently, it is watching the progress of Jamaica's new attempt at fiscal consolidation closely, with particular emphasis on the wage agreement with civil servants, as "The outcome will indicate whether support for the current fiscal program is still feasible."
It will be challenging for the Government to achieved the revised fiscal deficit target of 5.5% of GDP, whilst some are likely to argue that next years fiscal deficit target of 4.5% of GDP is disappointingly gradual.
However, if the fiscal target is actually met, as opposed to continually missed as has been the case in the past, this would be a significant achievement. Moreover, Jamaica's debt has actually increased much faster (up to double) the increase in the debt due to the central government deficit because of the huge losses of the major government guaranteed enterprises. If these losses are "cauterised" as planned, that would be a truly major break with the past.
In view of all these other challenges, there is a not insignificant risk that the impact of a US recession on Jamaica's main foreign exchange earners (tourism, bauxite and remittances) could tip Jamaica into a recession. The key to whether Jamaica will be able to avoid such an economic downturn will be whether the Government can move fast enough to implement the low hanging fruit of tax reform and the numerous projects that have either not been started, or have been moving at a very slow pace, over the past several decades. The likely collapse of the various "schemes", probably impacting the Jamaican economy in the second and third quarters of this year, will compound the Government's difficulty in achieving their relatively ambitious growth target (taking into account the circumstances) for 2008.
On the positive side, US interest rates are going to continue to fall, and a slowdown in the world economy should eventually reduce oil prices (fuel imports represented a mammoth US$1.9 billion or 17.8% of Jamaican GDP in 2007).
The critical variable is probably local business confidence, whose recovery will depend on whether the Government is seen to have the ability to implement its economic programme.