Tweet
What should we expect for the Jamaican economy in 2014?
BY KEITH COLLISTER
Wednesday, February 05, 2014
The recent increase in our international bond prices partially reflects an improvement in confidence, or what internationally acclaimed Professor Richard Curtin perhaps more accurately described, at the recent release of the Jamaica Chamber of Commerce Business and Consumer Confidence survey, as “a lessening of pessimism”.
TODAY, the IDB is expected to approve US$140 million in policy-based loans (PBL's) after a lending hiatus of more than two years. It is this money, in conjunction with funds stockpiled through PetroCaribe, that will pay out just under US$300 million in Jamaican government debt maturing on February 24. Consequently, in sharp contrast to the global emerging market (and Wall Street) sell-off, Jamaican Eurobond prices have been hardening over the past month (and yields falling), as local players holding the domestic maturing issue (mainly large banks) buy Jamaican Eurobonds to replace their US dollar denominated local bonds that are about to mature.
The recent increase in our international bond prices partially reflects an improvement in confidence, or what internationally acclaimed Professor Richard Curtin perhaps more accurately described, at the recent release of the Jamaica Chamber of Commerce Business and Consumer Confidence survey, as "a lessening of pessimism". Nearly all the improvement in confidence, from very weak levels, is due to Minister Peter Phillips and his economic team, who have so far shown an almost unprecedented determination to fulfil a very rigorous IMF agreement, including ramming through a very full legislative agenda.
An unscientific personal poll suggests the current investment mood can be broken down as follows: Sagicor's chief executive officer Richard Byles is optimist in chief (having very clearly put his money where his mouth is by buying RBC Jamaica), cautious optimism by some of the large companies, the majority of businesses saying yes, it is good that Jamaica is passing IMF tests but still concerned about our many obstacles to growth, with a very substantial bloc of pessimists (including probably most foreign observers) believing we'll be back again with another National Debt Exchange (NDX) or worse in 12 to 18 months. This poll would exclude the large number of small businesses simply fighting for survival, one of whom colourfully described themselves as "bawling like the peanut man".
Another key reason for the Eurobond rally is the expected improvement in US dollar liquidity. Before the debt exchanges, Jamaica's financial system was highly liquid, with most Jamaican dollar debt being very short (under three years), and with numerous instruments. Since the debt exchange last year, which again pushed out the maturity of virtually all domestic debt by roughly three years or more (the 2014 maturity in February was a deliberate exception), the Jamaican debt market has been essentially frozen, and Jamaica has not borrowed in the domestic or international capital market.
Critically, this "freeze" may no longer be primarily due to fear of default. After the debt exchange, all financial institutions — banks, insurance companies and pension funds — have been trying to become more liquid at the same time. Banks, with an obligation to turn deposits into cash, naturally need short instruments. Insurance companies and pension funds, for the most part, had large exposures to government paper and are now all trying to diversify. However, due to the lack of portfolio liquidity, most of them will have been unable to achieve this objective, with the consequence that some of the larger loans and securities deals, required to finance investment in the economy, have had difficulty in getting financed.
In analysing what to expect in 2014, it is first necessary to benchmark where we were at the end of 2013. Key retailers believe last Christmas was the worst in nearly two decades, and despite a rise in third quarter GDP of 0.5 per cent (annualised), the economy still appears incredibly weak. What I have labelled the "great squeeze" continues, specifically the need to simultaneously eliminate our fiscal deficit and reduce our balance of payments deficit to tolerable levels. The current account deficit is projected to fall from about 12.5 per cent of GDP to a still very high 10 per cent this fiscal year, but so far entirely from a decline in imports, an obvious consequence of the weak economy.
This "bitter medicine" started in the previous budget cycle, with the massive tax package of nearly two years ago. If Jamaica achieves a balanced budget this year it would have undergone an almost unprecedented fiscal correction. Consequently, the negative fiscal drag should end by April 2014, allowing positive, but very anaemic growth this calendar year.
However, the living standards of the man on the street are likely to continue to decline as any GDP growth will be due to a reduction in the current account deficit. The way to understand this is that GDP is equal to domestic demand plus net trade. A reduction in our trade deficit (this drives our current account deficit as we have a surplus on services from tourism), due to a decline in imports, of, say, 2.5 per cent of GDP, would more than offset a decline of, say, 1.5 per cent in domestic demand, allowing positive GDP growth of, say, one per cent despite declining consumption.
The Jamaican dollar is likely to remain under pressure, as, since the start of the global financial crisis, there has been a dramatic reduction in both foreign direct investment (FDI), down by an average of nearly three quarters from its highs, and in our ability to borrow internationally. The expected large foreign direct investments in energy, the logistics hub, and tourism will at best only begin late in the year. Restoration of international capital market access will probably require the passing of at least two to three more IMF tests including tabling a credible budget. There is also the clear danger of treating FDI as some kind of "magic bullet", allowing one to avoid necessary reforms.
In summary, Minister Phillips performance so far deserves to generate "cautious optimism" amongst investors. However, the key to a real turnaround in the economy that will benefit the man on the street will be the restoration of internal and external liquidity, large-scale foreign direct investment and an acceleration of Jamaica's ambitious economic reform agenda, ultimately requiring growth in employment through the creation of new industries. This suggests that the next nine months will feel at least as difficult as the last nine months, even if we technically achieve positive GDP growth, with the prospect of real improvement only in the last quarter of the year.
BY KEITH COLLISTER
Wednesday, February 05, 2014
The recent increase in our international bond prices partially reflects an improvement in confidence, or what internationally acclaimed Professor Richard Curtin perhaps more accurately described, at the recent release of the Jamaica Chamber of Commerce Business and Consumer Confidence survey, as “a lessening of pessimism”.
TODAY, the IDB is expected to approve US$140 million in policy-based loans (PBL's) after a lending hiatus of more than two years. It is this money, in conjunction with funds stockpiled through PetroCaribe, that will pay out just under US$300 million in Jamaican government debt maturing on February 24. Consequently, in sharp contrast to the global emerging market (and Wall Street) sell-off, Jamaican Eurobond prices have been hardening over the past month (and yields falling), as local players holding the domestic maturing issue (mainly large banks) buy Jamaican Eurobonds to replace their US dollar denominated local bonds that are about to mature.
The recent increase in our international bond prices partially reflects an improvement in confidence, or what internationally acclaimed Professor Richard Curtin perhaps more accurately described, at the recent release of the Jamaica Chamber of Commerce Business and Consumer Confidence survey, as "a lessening of pessimism". Nearly all the improvement in confidence, from very weak levels, is due to Minister Peter Phillips and his economic team, who have so far shown an almost unprecedented determination to fulfil a very rigorous IMF agreement, including ramming through a very full legislative agenda.
An unscientific personal poll suggests the current investment mood can be broken down as follows: Sagicor's chief executive officer Richard Byles is optimist in chief (having very clearly put his money where his mouth is by buying RBC Jamaica), cautious optimism by some of the large companies, the majority of businesses saying yes, it is good that Jamaica is passing IMF tests but still concerned about our many obstacles to growth, with a very substantial bloc of pessimists (including probably most foreign observers) believing we'll be back again with another National Debt Exchange (NDX) or worse in 12 to 18 months. This poll would exclude the large number of small businesses simply fighting for survival, one of whom colourfully described themselves as "bawling like the peanut man".
Another key reason for the Eurobond rally is the expected improvement in US dollar liquidity. Before the debt exchanges, Jamaica's financial system was highly liquid, with most Jamaican dollar debt being very short (under three years), and with numerous instruments. Since the debt exchange last year, which again pushed out the maturity of virtually all domestic debt by roughly three years or more (the 2014 maturity in February was a deliberate exception), the Jamaican debt market has been essentially frozen, and Jamaica has not borrowed in the domestic or international capital market.
Critically, this "freeze" may no longer be primarily due to fear of default. After the debt exchange, all financial institutions — banks, insurance companies and pension funds — have been trying to become more liquid at the same time. Banks, with an obligation to turn deposits into cash, naturally need short instruments. Insurance companies and pension funds, for the most part, had large exposures to government paper and are now all trying to diversify. However, due to the lack of portfolio liquidity, most of them will have been unable to achieve this objective, with the consequence that some of the larger loans and securities deals, required to finance investment in the economy, have had difficulty in getting financed.
In analysing what to expect in 2014, it is first necessary to benchmark where we were at the end of 2013. Key retailers believe last Christmas was the worst in nearly two decades, and despite a rise in third quarter GDP of 0.5 per cent (annualised), the economy still appears incredibly weak. What I have labelled the "great squeeze" continues, specifically the need to simultaneously eliminate our fiscal deficit and reduce our balance of payments deficit to tolerable levels. The current account deficit is projected to fall from about 12.5 per cent of GDP to a still very high 10 per cent this fiscal year, but so far entirely from a decline in imports, an obvious consequence of the weak economy.
This "bitter medicine" started in the previous budget cycle, with the massive tax package of nearly two years ago. If Jamaica achieves a balanced budget this year it would have undergone an almost unprecedented fiscal correction. Consequently, the negative fiscal drag should end by April 2014, allowing positive, but very anaemic growth this calendar year.
However, the living standards of the man on the street are likely to continue to decline as any GDP growth will be due to a reduction in the current account deficit. The way to understand this is that GDP is equal to domestic demand plus net trade. A reduction in our trade deficit (this drives our current account deficit as we have a surplus on services from tourism), due to a decline in imports, of, say, 2.5 per cent of GDP, would more than offset a decline of, say, 1.5 per cent in domestic demand, allowing positive GDP growth of, say, one per cent despite declining consumption.
The Jamaican dollar is likely to remain under pressure, as, since the start of the global financial crisis, there has been a dramatic reduction in both foreign direct investment (FDI), down by an average of nearly three quarters from its highs, and in our ability to borrow internationally. The expected large foreign direct investments in energy, the logistics hub, and tourism will at best only begin late in the year. Restoration of international capital market access will probably require the passing of at least two to three more IMF tests including tabling a credible budget. There is also the clear danger of treating FDI as some kind of "magic bullet", allowing one to avoid necessary reforms.
In summary, Minister Phillips performance so far deserves to generate "cautious optimism" amongst investors. However, the key to a real turnaround in the economy that will benefit the man on the street will be the restoration of internal and external liquidity, large-scale foreign direct investment and an acceleration of Jamaica's ambitious economic reform agenda, ultimately requiring growth in employment through the creation of new industries. This suggests that the next nine months will feel at least as difficult as the last nine months, even if we technically achieve positive GDP growth, with the prospect of real improvement only in the last quarter of the year.
Comment