Friday, January 30, 2009

Preparing for the economic storm

On July 18, 2008, I wrote an article called the "Perfect economic storm", in which I said the following six to nine months would be the worst period in Jamaica's economic history. At the time, even though I had indicated from the year before that the US would go into recession, I did not think the global crisis would have been as bad as it is and is expected to become.

Last week, for example, in a single day, listed companies in the US announced over 50,000 layoffs. This is in addition to the hundreds of layoffs at unlisted companies. The unemployment rate in the US is projected to go up to 10 per cent. Countries across the globe are seeing record levels of unemployment and jobless claims. In Jamaica, the Planning Institute of Jamaica (PIOJ) has indicated the economy will decline by over two per cent in 2009/10 and unemployment will rise to 12 per cent. The director-general of the PIOJ is telling us to brace for rough times ahead.

I have even been in contact with business people who are having a very difficult time.

Why are we surprised?
My response is, we should not be surprised. From as early as 2007 I remember espousing the US would go into recession and that it would significantly affect Jamaica because of the significant per cent of our trade with that country. Even while others were saying that we could look to other countries, I cautioned against Europe, Canada, and the UK as I expected them to be affected because of the trade they do with the US also. The fact is that today it seems as if the Eurozone and UK may be in worse shape than the US, hence the strengthening of the US dollar against those currencies.

So I was ridiculed by some for suggesting that Jamaica would see a significant downturn and was told to think positively. Well, I tried, but the logics of technical and fundamental analysis of the markets have not allowed me to think that way, as my brain resisted any thought of irrationality.

So I am sorry for thinking the Jamaican economy into a downturn. And I am going to make an adjustment to my prediction of July 18, 2008, as I was wrong about the following six-to-nine-month period being the worst in our economic history and change that to the 12 to 24 months from today. As I have always been saying - and I see that the PIOJ agrees - the global effects will linger on in Jamaica for at least 12 months after they have ended in the US.

The extent to which the crisis affects us though, will depend on how we prepare for it as a country, companies, and individuals. The fact is that if we prepare correctly there are opportunities available, and some significant ones if we prepare properly. And these opportunities are there for the country, companies, and individuals. I will not go into the specific opportunities, as I have committed to addressing them for two entities in February and would not want to pre-empt that. But suffice it to say that economic activity is like a trade.
For there to be a loser there must be a winner on the other side. What we must do is ensure that we are on the winning side. After all, managing risk is all about having knowledge and how we act. Risk reduces with knowledge, and is the difference between a gamble and a trade for example. A trade is making a decision with research and knowledge of where the probabilities are highest. A gamble is making a decision without proper analysis.
So as a country, and companies, we must decide if we want to make a trade or a gamble.

The threat of inaction
But as I said to Bev Manley last year, my greatest fear for Jamaica, and companies, is not that we do not know, or have the ability to know, what to do. It is that our politics, bureaucracy, and refusal to face reality will drive us to inaction. While the rest of the world has been debating since last year how they intend to, as one team, address the coming (not here yet) eye of the economic storm, Jamaica has been sidelined by distractions around issues that have nothing to do with progress but rather scoring individual points.

The opportunities that can accrue to Jamaica, and companies, can only come through preparation. Gone are the days when anyone could make a prediction about markets and what will happen. In a market where everything was going up that was easy. Try today when most things are going down, and volatility is the order of the day.

Today requires real analysis. An example I have is a situation where someone asked me about my recommendations made on equities, based on the fact that the PE ratio was low. This proved to me that some of the financial advisors have not come to grips with what is happening in markets today, as a cursory look at PE ratios only works when markets are going up, or are fairly stable. What is required now is hard-nosed balance sheet and company analysis. Needless to say, I promptly advised her not to listen to that financial institution again.

As a country we have to face the reality that we do not have the reserves to do what countries like the US and UK can, or even little Trinidad or Barbados. That is a large enough fiscal stimulus package that will create a real positive impact. Let's face the facts that we just do not have the money, as while the world was growing at record levels we squandered the opportunities to capitalise on that. Since 1972, we have grown an average of around 1.8 per cent per annum, and certainly over the last 15 years or so we have averaged less than one per cent per annum.
So now that we have dug ourselves into this deep hole, with what seems like the intention of creating a pathway to hell, we have to approach the crisis in a different manner. When one is in such a deep hole, with no ladder or other implement to help us out, the only way to get to the top is to slowly pile up dirt until it reaches the top. So what we must do to turn the economy around is to carefully put the structures in place to ensure that quality growth takes place in the economic and social environment.

For example, I would have thought that one of the most fundamental things that every company should be looking at immediately, if not done already, is to have a two-day strategic planning session with a view of creating a crystal ball view of the fortunes of the company over the next two years. This way, a decision can be made about what should be done to take advantage of opportunities, stay afloat, or shut down. Not doing so and then wanting to make a decision after everything has failed is mere stupidity to say the least.

As I always say, though, when one is sick we go to doctors. Why then when we need financial and strategic help do we not speak to those who understand what is happening and can make practical forecasts? The power of positive thinking has always, in my view, been a fad that some writers made a lot of money from. Of course, one must have a positive attitude but it must be within a context of the power of "practical thinking".

My advice to the country, companies, and individuals is the worst is yet to come. All we have been seeing thus far is the fallout from the alternative investment schemes. Get professional advice. And the situation is not any better in other parts of the globe, and may be worse in terms of impact, as this is a worldwide economic storm.


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