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New JLP administration seen as 'pro-growth, market-friendly'
published: Friday | September 21, 2007
Keith Collister, Business Writer
Dr. Carl Ross, senior managing director and head of emerging markets and fixed income research at New York-based Bear Stearns and Co. - File
Bear Stearns upgraded its recommendation on Jamaican bonds from underperform to market perform September 5, reaffirming the position less than two weeks later in a signal of confidence in the new political administration.
The recommendation was mainly on technical grounds: that Jamaica's repayment of the US$225 million eurobond on September 1 and the additional repayment of a US$125 million local U.S. dollar-denominated index bond over the same period would provide strong institutional support for Jamaican eurobonds.
This was despite what Bear Stearns described in the same report as poor economic fundamentals inherited from the previous administration.
"The JLP inherits a difficult economic situation, with a fiscal deficit supposed to be 4.5 per cent of GDP, real GDP growing at 2.0 per cent of GDP, a current account deficit approaching 10.0 per cent of GDP, and a large debt burden," said the investment bank.
Bear also noted that the Bank of Jamaica had been selling dollars as capital flows had slowed, with inflation the only apparent bright spot at 5.6 per cent to June.
Inflation worsened
In its emerging markets sovereign weekly report issued September 14, however, Bear noted that inflation had considerably worsened and was now projected at around 8-10 per cent due to high oil prices and damage to the agricultural sector.
Its expected growth rate for Jamaica had also been lowered and was now projected to be "closer to the PIOJ's estimate of 1.1 per cent GDP this year."
"Amid all these challenges, the new JLP government was confronted with a new one this week - they faced an immediate fiscal deficit of J$15 billion (some 2.0 per cent of GDP)."
Dr. Carl Ross, the author of both reports, was asked by the Financial Gleaner what level of fiscal overrun had been expected by him and the international capital market.
"Unfortunately, Jamaica's record on keeping to its fiscal targets has been poor," said Ross.
"I think the market had some confidence that the government would at least come close this year, since the deficit target itself was relatively high, even excluding the accounting for previous expenditures. A 2.5 per cent of GDP deviation from this year's 4.5 per cent target is a huge deviation. Very unexpected."
J$ Weakness
In the same sovereign weekly report, Bear cited the repayment of the eurobond and index bond as largely responsible for Jamaica's dollar weakness.
"We attribute much of the recent depreciation to institutions that were holding this instrument (and other recently - amortising locally issued U.S. dollar-indexed bonds) positioning themselves for the amortisations by buying other U.S. dollar-denominated assets.
Local sources also attribute this depreciation to election uncertainty and the repatriation of month-end dividends."
Nevertheless, Bear appeared positive on Jamaica's long term economic outlook.
"We view Mr. Golding's policy as pro-growth and market - friendly," the bank said.
It expects the JLP to focus on job creation and improvements in human and physical capital, and to follow through on constitutional limits on public debt and fiscal deficits as contained in its manifesto.
Asked what type of specific measures the Bruce Golding administration should take to deal with this fiscal problem, Dr. Ross cited the recent example of Costa Rica.
"Historically, Costa Rica has never been able to balance its budget. Deficits never really got out of control, but they were chronic. A few years ago the government attempted to adopt a tax reform, which was essentially a tax increase designed to balance the budget while preserving Costa Rica's generous social programmes," said Ross.
"A small, pro-market liberal party basically prevented the tax increase from getting passed. As a result, spending was cut, the economy grew, tax revenues are flying even with no tax rates increases, local debt interest rates are falling as a result, and the budget is balanced."
Asked whether the new government should do a full budget house cleaning immediately, com-municating the full extent of Jamaica's fiscal problems, and whether the international capital market will punish Jamaica for being honest, Ross said from a market perspective 'transparency is king'.
"The previous government, to its credit, made huge strides in fiscal transparency, but it would seem that more needs to be done," he said.
"I believe that a 'coming clean' is the best strategy, both politically and economically. The deviations from target can be legitimately blamed on the 'other guys'.
"For the coming clean to be effective, however, it has to be accompanied by a plan from the 'new guys' on the way forward. No one expects all the answers, but the more specific the better."
In its latest report, Bear also appeared positive on the Cabinet, particularly the picks for the Ministry of Finance - Audley Shaw as Minister of Finance prominent businessman from GraceKennedy Don Wehby and trade union leader Dwight Nelson.
"These appointments, in our view, significantly bolster the Ministry of Finance and increase the likelihood of meaningful public-sector reform.
The FG also asked Ross his opinion on whether Jamaica had now regained international capital market access in the light of the much more positive tone to emerging markets after Tuesday's bigger than expected interest rate cut by the Federal Reserve.
Said the emerging markets specialist: "The EM market has improved dramatically over the past few days since the Fed surprisingly cut interest rates by 50 basis points. We still have not seen a flurry of emerging market bond deals getting priced, but I expect it to happen in the coming weeks. I believe that in the current market, yes, Jamaica would have access to the international markets."
published: Friday | September 21, 2007
Keith Collister, Business Writer
Dr. Carl Ross, senior managing director and head of emerging markets and fixed income research at New York-based Bear Stearns and Co. - File
Bear Stearns upgraded its recommendation on Jamaican bonds from underperform to market perform September 5, reaffirming the position less than two weeks later in a signal of confidence in the new political administration.
The recommendation was mainly on technical grounds: that Jamaica's repayment of the US$225 million eurobond on September 1 and the additional repayment of a US$125 million local U.S. dollar-denominated index bond over the same period would provide strong institutional support for Jamaican eurobonds.
This was despite what Bear Stearns described in the same report as poor economic fundamentals inherited from the previous administration.
"The JLP inherits a difficult economic situation, with a fiscal deficit supposed to be 4.5 per cent of GDP, real GDP growing at 2.0 per cent of GDP, a current account deficit approaching 10.0 per cent of GDP, and a large debt burden," said the investment bank.
Bear also noted that the Bank of Jamaica had been selling dollars as capital flows had slowed, with inflation the only apparent bright spot at 5.6 per cent to June.
Inflation worsened
In its emerging markets sovereign weekly report issued September 14, however, Bear noted that inflation had considerably worsened and was now projected at around 8-10 per cent due to high oil prices and damage to the agricultural sector.
Its expected growth rate for Jamaica had also been lowered and was now projected to be "closer to the PIOJ's estimate of 1.1 per cent GDP this year."
"Amid all these challenges, the new JLP government was confronted with a new one this week - they faced an immediate fiscal deficit of J$15 billion (some 2.0 per cent of GDP)."
Dr. Carl Ross, the author of both reports, was asked by the Financial Gleaner what level of fiscal overrun had been expected by him and the international capital market.
"Unfortunately, Jamaica's record on keeping to its fiscal targets has been poor," said Ross.
"I think the market had some confidence that the government would at least come close this year, since the deficit target itself was relatively high, even excluding the accounting for previous expenditures. A 2.5 per cent of GDP deviation from this year's 4.5 per cent target is a huge deviation. Very unexpected."
J$ Weakness
In the same sovereign weekly report, Bear cited the repayment of the eurobond and index bond as largely responsible for Jamaica's dollar weakness.
"We attribute much of the recent depreciation to institutions that were holding this instrument (and other recently - amortising locally issued U.S. dollar-indexed bonds) positioning themselves for the amortisations by buying other U.S. dollar-denominated assets.
Local sources also attribute this depreciation to election uncertainty and the repatriation of month-end dividends."
Nevertheless, Bear appeared positive on Jamaica's long term economic outlook.
"We view Mr. Golding's policy as pro-growth and market - friendly," the bank said.
It expects the JLP to focus on job creation and improvements in human and physical capital, and to follow through on constitutional limits on public debt and fiscal deficits as contained in its manifesto.
Asked what type of specific measures the Bruce Golding administration should take to deal with this fiscal problem, Dr. Ross cited the recent example of Costa Rica.
"Historically, Costa Rica has never been able to balance its budget. Deficits never really got out of control, but they were chronic. A few years ago the government attempted to adopt a tax reform, which was essentially a tax increase designed to balance the budget while preserving Costa Rica's generous social programmes," said Ross.
"A small, pro-market liberal party basically prevented the tax increase from getting passed. As a result, spending was cut, the economy grew, tax revenues are flying even with no tax rates increases, local debt interest rates are falling as a result, and the budget is balanced."
Asked whether the new government should do a full budget house cleaning immediately, com-municating the full extent of Jamaica's fiscal problems, and whether the international capital market will punish Jamaica for being honest, Ross said from a market perspective 'transparency is king'.
"The previous government, to its credit, made huge strides in fiscal transparency, but it would seem that more needs to be done," he said.
"I believe that a 'coming clean' is the best strategy, both politically and economically. The deviations from target can be legitimately blamed on the 'other guys'.
"For the coming clean to be effective, however, it has to be accompanied by a plan from the 'new guys' on the way forward. No one expects all the answers, but the more specific the better."
In its latest report, Bear also appeared positive on the Cabinet, particularly the picks for the Ministry of Finance - Audley Shaw as Minister of Finance prominent businessman from GraceKennedy Don Wehby and trade union leader Dwight Nelson.
"These appointments, in our view, significantly bolster the Ministry of Finance and increase the likelihood of meaningful public-sector reform.
The FG also asked Ross his opinion on whether Jamaica had now regained international capital market access in the light of the much more positive tone to emerging markets after Tuesday's bigger than expected interest rate cut by the Federal Reserve.
Said the emerging markets specialist: "The EM market has improved dramatically over the past few days since the Fed surprisingly cut interest rates by 50 basis points. We still have not seen a flurry of emerging market bond deals getting priced, but I expect it to happen in the coming weeks. I believe that in the current market, yes, Jamaica would have access to the international markets."
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