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The new Jamaica Labour Party (JLP) government appears to have inherited a near-perfect storm.
The administration is facing a current account deficit of around 10 per cent of gross domestic product (GDP) - along with a weakening of foreign direct investment flows necessary to finance it - real GDP for 2007 now projected to only grow at just over 1.0 per cent post-Hurricane Dean, inflation to near double-digit rates, a weak Jamaican dollar prompting the central bank to effectively raise interest rates.
The finance team must also manage a large debt burden that no longer appears to be falling measured in terms of GDP, a fiscal deficit that may be as high as 7.0 per cent of GDP, and up to very recently, at least since the subprime crisis started in the United States, an apparent lack of capital market access for Jamaica abroad.
Fairly flat market
Unsurprisingly, this negative macroeconomic environment has offset any expected stock market bounce on the end of the political uncertainty represented by the JLP victory, with a fairly flat market since the election.
Atop all these local negatives, the world economic environment appears to be worsening, particularly in the U.S. and now Europe.
Only Asia and other emerging market economies, particularly those with natural resources such as oil, are still showing the stellar growth rates that we have become used to over the past five years.
In fact, emerging markets generally have seen an unprecedented world boom over the past five years, with growth rates of five to six per cent not uncommon, while real stars such as China grew at double-digit rates, and accumulated very high levels of foreign exchange reserves.
At first glance, Jamaica's situation looks very similar to the perfect storm that caused the near crisis of 2003, but there are some major qualitative differences that make such a crisis very unlikely.
The level of foreign exchange reserves are much higher than 2003, and Jamaica has no new eurobond repayments until 2009.
Performed well
Any reappearance of fears of default on our external debt - fear in 2003 led to the collapse of GOJ eurobond prices at that time - are, therefore, without foundation, at least in the short to medium term, and indeed the Jamaican eurobond market has performed well over the same period when our previously hidden macro problems have become more transparent.
More remarkably, this bond rally occurred even during a period when it was not clear that Jamaica had capital market access, which it may now have effectively regained after the Fed's recent 50 basis point interest rate cut and the much better tone of emerging markets over the past couple of weeks.
The local money market players, who hold the majority of our local debt, are also much better capitalised, with capital to assets ratio averaging between two and three times higher than in 2003.
The Bank of Jamaica will not repeat its 'shock and awe' interest rate policy of 2003, now being cognisant of its dangers in a country with a very high level of debt.
Indeed, the central bank has just withdrawn the 14 per cent instrument it issued a week ago Tuesday to defend the dollar.
Better communication
Perhaps most importantly, the level of communication between private sector and government is likely to be immeasurably better than in those dark days of early 2003.
The market rumours of an imminent new international bond issue, of up to US$500 million, appear to be wholly unfounded.
The previous government raised US$350 million earlier this year out of a planned US$500 million programme.
That programme is almost equivalent to Jamaica's external principal debt repayment over the fiscal year, and reflects the then government policy of not increasing the nominal value of the foreign debt.
The Ministry of Finance had, in fact, planned to go to market before the recent overseas turbulence, but only to raise US$150 million to complete its borrowing programme.
External amortisation or debt repayment for the rest of the fiscal year is estimated to be roughly US$200 million to US$250 million, nothing that would present a problem at Jamaica's current level of foreign exchange reserves even if the new administration were unable to borrow the remaining US$150 million.
This is highly unlikely, however, as the long rumoured strategy of reopening one of Jamaica's outstanding bond issues, such as the 2039 issue, and borrowing US$150 million to bring the issue into the EMBI (Emerging Market Bond Index) should work except under the extremely unfavourable market conditions experienced in the recent past.
Cutting rates
The U.S. Federal Reserve is likely to continue cutting interest rates in the coming months, which should provide a window of opportunity for Jamaica to borrow internationally.
The Government should weigh carefully, however, such an opportunistic strategy against the strategy of doing a new slightly larger bond issue, say US$250 to US$350 million, as part of a selling process to introduce their new economic team to the international capital market.
In this process, the top-tier international investment banks should be used not merely to raise some money for Jamaica, but also be co-opted in Jamaica's foreign investment promotion process.
The same U.S. investment banks used to raise debt have contacts with all the CEOs and CFOs of America's largest companies through their very large corporate advisory businesses, as do the large institutional fund managers, such as the giant Fidelity mutual fund, which also buys Jamaican debt.
One of the strongest selling points to this corporate class of foreign investor is that the Government appears to be trying to develop much better relations with the private sector than the past.
This is particularly important as the local private sector will be one of the first points of contact of any smart foreign investor's due diligence.
The administration is facing a current account deficit of around 10 per cent of gross domestic product (GDP) - along with a weakening of foreign direct investment flows necessary to finance it - real GDP for 2007 now projected to only grow at just over 1.0 per cent post-Hurricane Dean, inflation to near double-digit rates, a weak Jamaican dollar prompting the central bank to effectively raise interest rates.
The finance team must also manage a large debt burden that no longer appears to be falling measured in terms of GDP, a fiscal deficit that may be as high as 7.0 per cent of GDP, and up to very recently, at least since the subprime crisis started in the United States, an apparent lack of capital market access for Jamaica abroad.
Fairly flat market
Unsurprisingly, this negative macroeconomic environment has offset any expected stock market bounce on the end of the political uncertainty represented by the JLP victory, with a fairly flat market since the election.
Atop all these local negatives, the world economic environment appears to be worsening, particularly in the U.S. and now Europe.
Only Asia and other emerging market economies, particularly those with natural resources such as oil, are still showing the stellar growth rates that we have become used to over the past five years.
In fact, emerging markets generally have seen an unprecedented world boom over the past five years, with growth rates of five to six per cent not uncommon, while real stars such as China grew at double-digit rates, and accumulated very high levels of foreign exchange reserves.
At first glance, Jamaica's situation looks very similar to the perfect storm that caused the near crisis of 2003, but there are some major qualitative differences that make such a crisis very unlikely.
The level of foreign exchange reserves are much higher than 2003, and Jamaica has no new eurobond repayments until 2009.
Performed well
Any reappearance of fears of default on our external debt - fear in 2003 led to the collapse of GOJ eurobond prices at that time - are, therefore, without foundation, at least in the short to medium term, and indeed the Jamaican eurobond market has performed well over the same period when our previously hidden macro problems have become more transparent.
More remarkably, this bond rally occurred even during a period when it was not clear that Jamaica had capital market access, which it may now have effectively regained after the Fed's recent 50 basis point interest rate cut and the much better tone of emerging markets over the past couple of weeks.
The local money market players, who hold the majority of our local debt, are also much better capitalised, with capital to assets ratio averaging between two and three times higher than in 2003.
The Bank of Jamaica will not repeat its 'shock and awe' interest rate policy of 2003, now being cognisant of its dangers in a country with a very high level of debt.
Indeed, the central bank has just withdrawn the 14 per cent instrument it issued a week ago Tuesday to defend the dollar.
Better communication
Perhaps most importantly, the level of communication between private sector and government is likely to be immeasurably better than in those dark days of early 2003.
The market rumours of an imminent new international bond issue, of up to US$500 million, appear to be wholly unfounded.
The previous government raised US$350 million earlier this year out of a planned US$500 million programme.
That programme is almost equivalent to Jamaica's external principal debt repayment over the fiscal year, and reflects the then government policy of not increasing the nominal value of the foreign debt.
The Ministry of Finance had, in fact, planned to go to market before the recent overseas turbulence, but only to raise US$150 million to complete its borrowing programme.
External amortisation or debt repayment for the rest of the fiscal year is estimated to be roughly US$200 million to US$250 million, nothing that would present a problem at Jamaica's current level of foreign exchange reserves even if the new administration were unable to borrow the remaining US$150 million.
This is highly unlikely, however, as the long rumoured strategy of reopening one of Jamaica's outstanding bond issues, such as the 2039 issue, and borrowing US$150 million to bring the issue into the EMBI (Emerging Market Bond Index) should work except under the extremely unfavourable market conditions experienced in the recent past.
Cutting rates
The U.S. Federal Reserve is likely to continue cutting interest rates in the coming months, which should provide a window of opportunity for Jamaica to borrow internationally.
The Government should weigh carefully, however, such an opportunistic strategy against the strategy of doing a new slightly larger bond issue, say US$250 to US$350 million, as part of a selling process to introduce their new economic team to the international capital market.
In this process, the top-tier international investment banks should be used not merely to raise some money for Jamaica, but also be co-opted in Jamaica's foreign investment promotion process.
The same U.S. investment banks used to raise debt have contacts with all the CEOs and CFOs of America's largest companies through their very large corporate advisory businesses, as do the large institutional fund managers, such as the giant Fidelity mutual fund, which also buys Jamaican debt.
One of the strongest selling points to this corporate class of foreign investor is that the Government appears to be trying to develop much better relations with the private sector than the past.
This is particularly important as the local private sector will be one of the first points of contact of any smart foreign investor's due diligence.
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