Thursday, November 01, 2007

Jamaica’s global challenge

Jamaica, like Iraq, is under attack from the US. But in our case this is not because the US is dropping bombs on us. In our case the attack is coming from the weakness, and possible recession, of the US economy. Most economic data coming out of the US is shows signs of weakness, and the sub prime mortgage problem may be spilling over into the broader economy. In fact, the worse of this crisis is not upon us, as many financial institutions are yet to write down the related instruments to market value.

Already companies such as Merrill Lynch and Bear Sterns have wrote down US$ billions, and CEOs are taking the rap, and who has not yet stepped down is under pressure. In the case of the giant, Merrill Lynch, the CEO stepped down after writing down some US$8.4 Billion, with another US$4 Billion write off expected.

Spiraling oil prices
At the same time oil prices topped US$96 per barrel, and at the time of writing is expected to go to US$100 per barrel, and could very well get there by publication. The truth is there is no fundamental basis for a US$100 price, but because of the ongoing tension in the Middle East and lower production out of the Gulf, traders are speculating that supplies will be threatened. And this is going into the US Winter season when demand for oil will increase.

The result is that US consumer confidence and spending have fallen, and the likelihood of a recession next year has increased. In fact some sectors are already deemed to be in a recession. This has resulted in the Federal Reserve (Fed) reducing interest rates within the past six weeks by 75 basis points from 5.75% to 4.50%, which normally would lead to an increase in consumer spending and benefit our 25% of export earnings and 75% tourism earnings that emanate from North America.

This would also have been good news for interest rates also but within the context of investors seeking high quality paper (US Treasuries), the positive impact has been minimal. There is some benefit for us though, as the variable rate instruments will re-price lower, saving us on interest costs, and any new debt instruments we issue can be accommodated at lower rates once we maintain confidence in our fiscal targets especially.

At present fuel consumption levels, in Jamaica, it will also mean that our fuel import bill will increase by approximately US$300 to US$400 Million. No doubt this is the greatest threat that we face to our Balance of Payments (BOP).

The question one would ask then is, doesn’t this mean that Jamaica will suffer under the current global conditions. And the answer is, if we do nothing about it then certainly. However, I believe that we are in a position to determine how much the global conditions impact us and what we need to do is face the challenges and do what is necessary to lessen the impact, or even benefit from the global imbalances.

The greatest threat to Jamaica is not from the global front but comes from within. In other words it is how we manage our affairs, and seek to deal with the challenges, that will determine how we fare. And this has always been the case, as even with recent peaks in global growth we still only managed to eke out less than 2%. In fact, the projections from the World Bank and IMF are that global growth reached a peak in 2006 and is expected to decrease in this and coming years. In short we were unable to take advantage of the peaks in growth, primarily because we lack the capacity to grow beyond a certain level.

Implement not study
What we need to do is break the habit of just recognizing problems and talking and studying them to death. As an example the rise in oil prices is upon us, and while US$100 may not be sustainable, oil may not fall below a price in the US$80s per barrel. This is still a big threat to our BOP. But we do have the capacity to change that expected impact, as we presently consume approximately 40% of our fuel in transportation.

This in turn impacts the fiscal accounts, as the bus fares for children and the elderly are subsidized by the government. So it is essential that we do something about this now, which does not need any reduction of subsidies, as we have the ability to deal with it otherwise. My own opinion is that the JUTC can be a catalyst for this change, as if it can be made into an efficient, reliable, and secure transportation system then we can transition to where Jamaicans feel comfortable taking the bus rather than driving everywhere they want to go. This will also ease the traffic congestion, saving not only fuel but the need to repair roads sooner rather than later. In addition, less traffic congestion means more productive time spent at the office rather than on the roads.

The downturn in the US economy also is countered by stronger economies globally, such as China, India, Russia, Canada, Europe etc. The first three accounting for half global growth in 2006 and expected to do so in 2007. Certainly the strategy for Jamaica should be to see how much of our products we can diversify to these growing markets, and how much tourists we can lure from these strong markets. After all their currencies are at highs against the US$, and means stronger spending power. Especially going into the tourism winter season we need to start the wooing of these markets now, which may pay more dividends than focusing on the US market where consumers are careful about how they spend their dollar.

These options can begin to pay dividends within a few months but it is essential that we act now, and set timelines for action plans. We cannot remain in the mode of studying the problem and getting the widest possible consultation. By the time we are finished with all of that we will have suffered the full impact, as global markets today change rapidly and will not await our studies and consultations. We must measure the risks to the country between implementation and research. After all governments are put there to govern in the interest of the people, not consult on everything when it is apparent that the risks of delay are high.

It is within this light that I believe that the move by Audley Shaw to request that the multilaterals reconsider their policy on lending to middle income countries be applauded. Many have questioned how successful this move will be, as the multilaterals have maintained the policy for a while that countries like Jamaica do not qualify for this lower cost funding.

But my own view is that if they say no then we remain in the same position. If on the other hand they say yes then Jamaica could benefit from lower interest costs. In other words the upside is greater than the downside risks, so what is the big deal about the request being made. This as far as I am concerned is not only thinking outside of the box but a plea by the Finance Minister on behalf of all Jamaicans, as our fiscal accounts would be positively affected.


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