Friday, March 25, 2011

Energy again

FROM early last year I pointed out that Jamaican businesses were feeling inflationary pressures and that as soon as the economic recovery started we would begin to see price increases. Additionally I indicated that oil and food prices would see increases come 2011. Because of what I expected, when oil was around US$50 per barrel I invested in solar equipment and have never regretted it. I believe the time to do such investments is before the crisis, and at the time I encouraged everyone to do the same.

Oil is now trading above US$105 per barrel and JPS will be hiking rates by 10 per cent. The NWC has hinted at a rate increase. My only regret is that I did not fully replace JPS. However, I didn't expect the Middle East uprising which has caused oil prices to increase so quickly.

So here we are once again, having been in this position in 2008, but forgetting about that period as a result of oil prices plummeting in 2009. The "9 day wonder" psyche of Jamaicans. Similarly, when we had drought conditions last year everyone was complaining about the need to improve the water supply infrastructure. The government announces the two-month closure of the Bog Walk Gorge to improve the water supply and receives many complaints. So we may once again complain about the water supply infrastructure at the next drought.

While the immediate crisis we face is energy, we must look beyond that, as graver implications are yet to come. The increase at the pumps and light bills is just the tip of the iceberg if oil prices continue to remain over US$100 per barrel. The real problem lies in the threat to global economies, which could lead to further social unrest around the globe, as higher energy costs translate into higher commodity and food prices also. This is at a time when unemployment levels are still relatively high and disposable incomes have declined considerably.

The Jamaican economy will no doubt have to be propped up by government spending, for example the JDIP and PIOJ Growth Inducement Strategy. While I advocated this for a while, as it was clear as day it would be needed, my only caution is that monies be spent wisely to ensure maximum sustainability or else we find ourselves chasing our tails again.

2011 is shaping up to be a difficult year for consumers, businesses, and the government. Already we are seeing that government will have to support the economy, as private capital will be very cautious in this environment. The fact is that businesses follow consumer expenditure and all indicators are that disposable income levels will be hit even further this year. The signs include increases in flour and baked products; increases by JPS, NWC, and the knock-on effect on other products; increases at the gas pumps; and a struggling global economy.

If you look at the recent major spending in the economy, and expenditure to come, they include (i) Falmouth Pier; (ii) JDIP work; and (iii) PIOJ Inducement Strategy. These are all government expenditure and are what the economy will have to continue to rely on in the short term. The main challenge with this is going to be the bureaucracy and the time it will take for the funds to be rolled out, and therefore it may not provide the greatest value added because of that.

It is clear therefore clear that the country and government are going to face challenges. The government in particular will be faced with the dilemma of soft revenue (because of a decline in disposable income), unemployment, and reduced company profits, and the fact that it has to be the primary driver of expenditure in the economy. So while the prudent thing seems to be to reduce the tax burden to drive economic expenditure, they are going to be faced with increased spending demands and weak revenue. So the million-dollar question is how to successfully juggle these demands versus what is needed, as it is going to be very difficult.

My own view is that there is no alternative but to programme further value-added loans in order to accomplish some form of vibrancy in the economy while keeping the wheels of government moving. Because I had expected this would happen I was calling from last year for greater stimulus spending from the government, as today there would be a reduced need for government spending.

I don't think, however, that anyone expected such a rapid rise in oil prices, which has also hastened the need for government expenditure. The immediate challenges we face continue to be energy and food, and should be the target of much of the expenditure to reduce costs to the country.

Ineffective Strata Commission

Since my article last week I have received much feedback to say that although my general thoughts about the strata commission are correct, it is actually much worse. An example was used that if someone owed maintenance fees of $250,000 for two years (assuming monthly maintenance of $12,500 ) and refuses to pay, then to access the recovery provision under the strata act through sale, you not only have to pay the $5,000 before the commission will talk to you but have to get two valuations on the property (approximately $100,000), advertise (approximately $50,000) and then wait at least three months before any action can be taken. So at the end of the period the corporation would have paid $155,000 to collect a $250,000 debt and would have to wait at least six months before they could recover (between the three-month waiting period and period to close the sale).

So my question then is, what value do Strata plans get from registering with the commission, as by the time one collects the debt the corporation is bankrupt and the property is run-down anyway. The Act is therefore a bigger burden to the corporation than it is to the delinquent owner. But as the often quoted saying goes: "The man who plays by the rules gets shafted". Welcome to Jamaica.

And understand this: the Strata corporation has no choice but to register with the commission, as it will be in breach and fined if it does not. Further, if it does not abide by the Act then it can be fined significant sums, which it will be unable to pay as it cannot collect maintenance.

My recommendation is that the government should suspend any requirement for Strata plans to register with the Commission and change the Act to conform more with the objective of protecting Strata properties. The fees paid already would be carried forward until the first year after the appropriate amendments. Otherwise this is nothing more than an unjust tax.

So the motto for the Strata Commission should be, "Contributing to the demise of strata properties....for a fee, of course".

Friday, March 18, 2011

Inducing growth

THIS week the PIOJ launched its plan for growth, titled "A GROWTH-INDUCEMENT STRATEGY FOR JAMAICA IN THE SHORT AND MEDIUM TERM". This is welcome, as a stimulus package from the government has been long overdue as a result of the strictures imposed on us by the IMF programme. We also see that the PIOJ in September 2010 stated that the IMF programme was contractionary, which is consistent with a belief held by others for a while.

While I welcome the strategy outlined by the PIOJ, I have a few concerns, the first of which is my hope that the bureaucracy does not prevent us from maximising the benefits from the programmes. We have in the past seen many such strategies developed, but we never derive the full benefits as our problem has always been in implementation, yet we are great conceptualisers.

The second concern comes from what is stated in the PIOJ document itself, where on page eight it says in bold type: "We were not called upon to construct a plan for long-term development of the economy". This is a big turn-off for me, as before even telling us about the programmes that are to be put in place to move the economy forward, the authors are putting forth a disclaimer about any link to long-term development. My own view is that the "Planning" Institute of Jamaica is supposed to be involved in long-term development planning, and so to produce a document where their primary role is denied seems contradictory.This is significant especially as they have a responsibility for Vision 2030.

On page 17 it then seeks to increase employment by growing the "labour-intensive industries", which to me is not necessarily the way to go as we should be trying to mechanise these industries for productivity improvement. What we should do is create employment by increasing the capacity in the areas where we have a comparative advantage, and that is one of the shortcomings of the document as it does not focus on international competitiveness to take advantage of exports or import substitution.

Overall, though, I agree that many of the projects included are necessary, particularly the infrastructure projects, and I want to support the government on establishing this initiative. I believe, however, that the limited resources could have been better utilised (greater ROI) by the PIOJ, and should undoubtedly be a part of the long-term development plans. The responsibility for this not happening I will have to place at the feet of the PIOJ, as they are the technical experts, and are the ones who propose this to the government, and not the other way around. While the government may say that they want to achieve growth in the economy, I expect that the technical implementation must rest with the body charged to drive the policy directive.

For example, I do not think that the document places enough emphasis on long-term productivity improvement (or even short-term), sustainable crime reduction, and what I like to call (as an accountant) "balance sheet improvement". The latter, of course, refers to the Balance of Payments.

I will not go into any further details on my analysis of the document, except to say that I hope that this is still a work in progress and can be adjusted to ensure that it is brought in line with the long-term development we need and not just focus on short-term growth. Having no doubt that the strategy will lead to short-term growth I applaud the efforts to provide this stimulus, but is this all we want from the PIOJ?

Public health strengths and weaknesses

Two weeks ago I had knee surgery done. It was a complicated procedure, as it involved meniscus repair, ACL reconstruction, drilling, and insertion of an implant.

When it was determined last year that the operation was necessary, I was advised to have it done overseas, at which point I started the investigations. After a few months of looking into it, I discussed the situation with Dr. Derrick McDowell, who was the head of the MAJ mission to Haiti and former head of the Orthopaedic Association, and apart from all of that his greatest attribute is that he is a Jamaica College Old Boy. He immediately explained to me that he does many of these surgeries and could easily do it.

He also advised me of the team he would be using (Jackie Minott - anaesthetist, Michelle Depass - physiotherapist), whom I also checked out, in keeping with my accounting training. I also checked with persons overseas to see what their experience with similar surgeries was, and they indicated that they experienced pain for a few days after the operation. I also did extensive reading on the procedure and anaesthesia methods.

After much reading and analysis of the information given to me by both Derrick and Jackie, in addition to my checks with persons overseas, I decided that there was no benefit to doing the surgery abroad. In fact I felt that one of the advantages of doing it in Jamaica was the ability to be in touch with the local team as needed.

I opted for spinal anaesthesia, and was enjoying watching the surgery being done while listening to my iPod. The next thing I remember is the bandage being put on and being wheeled back to the hospital room. On seeing Derrick later I asked why they had put me to sleep knowing that I wanted to see the operation, to which he responded that I was fully conscious but that the sedative I got causes amnesia, so I wouldn't remember what happened. That I found amazing. In addition, by the next day I had no pain at all, in contradiction to the experience of the persons overseas.

I say all that to point out our tendency not to recognise the competence of our local experts, and this is why we seem to always prefer to go for external consultants, who in many cases mess up a project and leave the Jamaicans to clean it up. One of the reasons for this choice is because we fail to do proper analysis up front. The result is that much of our talent (e.g. Bob Marley) is recognised abroad long before it is recognised in Jamaica.

It seems to me that the real problem with public health in Jamaica is a lack of good administration rather than the capacity of the workers, and I hope that the work being done by the Ministry of Health will soon resolve this long outstanding problem. The recent Observer story that shows specimens being stored in unsatisfactory conditions at the KPH illustrates the poor administration and controls.

Strata board

Recently I was having a conversation with the manager of a strata plan who was telling me that some of the owners still owed significant amounts for maintenance. When I enquired as to why she didn't go to the Strata Board and seek to enforce payment she indicated that she had, but before any action could be taken she would have to pay a fee of $5,000 per unit. I would have preferred to hear that action was taken and then the offending parties (owners in arrears) were asked to pay the $5,000, but not that the victim (strata), who has had to suffer because of the non-payment of what is due, is being asked to pay to access something to which they are entitled. This gives the impression that the main concern of the Strata Board is to raise funds rather than to improve compliance, as many strata properties still continue to suffer from what the Strata Board was set up to fix.

Friday, March 04, 2011

Oil and food price threats

oil and food

Last week I spoke to economic challenges in 2011 and businesses in particular. There are two primary reasons for this, one of which is the threat of oil and food prices increasing in 2011 beyond the reach of income levels of consumers and businesses. As a matter of fact, oil prices at US$100 to US$110/bbl today is more of a threat to the global and local economy than when oil prices reached US$147/bbl in 2008. The reason is because relative prices today would be greater than 2008.

The fact is that since 2008, economies and income levels in real terms have seen significant declines, and unemployment has increased. Despite growth seen in the global environment there has not been commensurate growth in employment. Spending has therefore not returned to 2007 levels. In Jamaica, for example, we have seen significant job losses and in the last quarter of 2010 job losses amounted to 21,000.

Added to the slow global economic recovery, the following factors will also negatively affect global growth:

1. Oil and food price hikes will have a negative impact on consumer spending and business costs. Although I anticipated increases in these two areas, I never expected it to occur so quickly. It was always expected that there would have been social unrest caused by declining costs of living, but the turmoil seen in the Middle East has come earlier and with a greater force than expected.

2. The expected pull-back in economic stimulus in the US will result in a slowdown in consumer spending.

3. The inflationary pressures globally will no doubt lead to increased interest rates, which will pull liquidity from the system and put the brakes on consumer spending and growth. In fact we have seen interest rate increases in China, which has been leading global growth.

4. There is still a lot of debt in the system that will have to be pared back with expenditure cuts.

So although growth is expected I believe food and oil prices will cause a slow-down.

The charts show oil and food price movements over the past year. In both cases we see significant increases, and if coupled with the fact that there has been a real decline in consumer disposable incomes then one can see the dilemma economies face. The oil chart shows that volumes are greater when prices are going up than when coming down, implying there are more buyers than sellers.

In Jamaica, we see the challenges of (i) job losses since 2007; (ii) business profits declining; (iii) high cost of energy and crime; (iv) relative inefficient agricultural production costs; (v) fiscal deficit; and (vi) very high dependency on imported oil.

These challenges are compounded by the fact that food and oil account for 46 percent of imports, and this is before the impact of the rising costs. This simple analysis shows the significant impact to be felt in Jamaica from oil and food price increases.

It is therefore evident that the greatest possible return is from a focus on dealing with the impact of food and oil on the economy. The impact of high energy costs on businesses in Jamaica, for example, makes our produce uncompetitive, whether it is from manufacturing or the tourism product. And tourism gets a double hit here, as food is also a significant cost component. This is important when we remember that tourism is our number one productive foreign exchange earner. So even though the number of tourist arrivals has increased (thanks in part to the efforts of the Tourism Ministry), the fact is that this has been achieved with (i) significantly discounted room prices; and (ii) increased costs, resulting in a lower retention of earnings in the country. One could therefore say the tourism industry has been facing its own stagflation.

So how do we deal with these global price increases? Clearly they will affect local demand as it means real disposable incomes will decline even further, if left unchecked. One can already see that reported business profits have declined, and anyone monitoring the real estate market can also see that prices have been getting lower.

The fact is that the most effective way of dealing with this situation is to focus on the domestic economy. This is not to say that there will not be opportunities for exports, but that the greater return on investment will come from focusing on the domestic economy infrastructure. As a start we if we focus on reducing our imports of oil and food, this will not only help our foreign exchange situation but will also create jobs and income income in the process. The problem is that it is important to find short-term solutions, which is possible, but necessitates the support of the bureaucracy.

One of the things I would like to add is how important it is for businesses at this time to engage the assistance of professionals; and among them importantly is a chartered accountant. And I use the term chartered accountant very carefully, because one of the things we recognised at the ICAJ is the need to ensure that our members are current with their knowledge and that the highest ethical standards are maintained amongst our membership, as in these difficult times employers need this assurance.

One of the initiatives we have therefore taken is to provide for employers a list of all ICAJ members on the website (, which tells whether they are compliant with continuing professional development or not. This is not to be glossed over, as it is going to be very important for businesses to have good analysis in charting the economic climate.