JAMAICAN BUSINESS CONFIDENCE PLUNGES

UNCLAS SECTION 01 OF 02 KINGSTON 002475

SIPDIS

STATE FOR WHA/CAR (WBENT),WHA/EPSC (JSLATTERY)

SANTO DOMINGO FOR FCS AND FAS

TREASURY FOR L LAMONICA

E.O. 12958: NA
TAGS: ECON EFIN JM
SUBJECT: JAMAICAN BUSINESS CONFIDENCE PLUNGES


1. Summary: Data published by the Jamaica Conference
Board on October 12 revealed that business confidence for
the September quarter plunged to its lowest level since
the second quarter of 2003. High levels of pessimism
about the country's economic prospects underlined the
significant decline in business confidence. This was in
contrast to consumer confidence, which improved over the
previous quarter, reflecting the relatively buoyant mood
of residents in tourist areas. Most consumers rated
current economic conditions as average or better than
average during the third quarter and expected conditions
to remain largely unchanged during upcoming periods.
While price instability has begun to impact on business
confidence, international investors remain bullish about
the country's economic fundamentals and ability to repay
debt. This was evidenced by the GOJ'S ability to raise
USD 250 million on the external capital market on October

10. However, confidence could be tested during 2006 if the
GOJ is unable to arrest the price instability. End
summary.

2. According to data released by the Jamaica Conference
Board (JCB) on October 12, Jamaican business confidence
sunk during the September quarter, posting its largest
decline during the four-year period of the survey. The
index of business confidence was 97.2 in the September
quarter, down from 122.8 in the June quarter. This 21
percent decline in business confidence obliterated all the
gains recorded since 2004. The significant decline in
confidence was underpinned by pessimism about economic
prospects by firms in all industries and of all sizes.
Almost 90 percent of all firms thought that the Jamaican
economy had declined in the review quarter, while about 70
percent of all firms expected the economy to worsen due to
oil prices, economic and crime concerns. The anticipated
slowdown in the US economy is also expected to have a
dampening impact on tourism. According to Professor
Richard Curtin of the University of Michigan, who analyses
the data for the JCB, this was the least favorable
Jamaican economic outlook recorded since the September 11
terrorist attacks in the United States. During the
September quarter, one-in-three firms reported that
profits were lower than projected, while fewer firms
expected improved profitability in upcoming quarters due
to the inability to pass on the higher cost of energy to
consumers. Influenced by concerns about oil prices,
taxes, economic policies, interest costs and crime, fewer
firms were willing to invest in expanding productive
capacity.


3. In contrast, the index of consumer confidence rose by
nine percent to 108.9, reflecting the relatively buoyant
mood of residents in tourist areas. This mood contradicts
the constant reports from hoteliers that the sector is in
crisis. Almost sixty percent of consumers rated current
economic conditions as average or better than average
during the third quarter and expected conditions to remain
largely unchanged during upcoming periods. Jamaicans were
also more upbeat about the current availability of jobs,
although apprehensions about job prospects have increased.
Like businesses, consumers are anticipating increased
prices. The surge in oil prices has begun to feed
inflationary expectations, with over 90 percent of all
Jamaicans expecting higher inflation during the year
ahead. As a consequence, most Jamaicans are anticipating
increased income to compensate for the higher inflation.


4. Higher than anticipated inflation has begun to drive
uncertainty among Jamaicans. Inflation of 10.1 percent
for April to September has already surpassed the GOJ'S
full fiscal-year target of nine percent. Rising oil
prices (gas prices have doubled since January 2005) have
fueled most of the inflationary impulses. Higher domestic
food prices due to the impact of two hurricanes and an
increase in consumption taxes, bus fares and utilities
have also fed inflation. The higher inflation, which has
outpaced wage increases, has led to a falloff in
consumption and by extension sales. With businesses
finding it difficult to pass on the full impact of
especially the oil price increase, profits, investment
activity and overall economic expansion have remained
sluggish. The slow depreciation in the exchange rate, the
expansion in the fiscal deficit relative to target and the
sluggish economic performance have also provided
additional impetus for the reduction in business
confidence.


5. Amidst the drop in confidence, the GOJ was able to
raise USD 250 million by way of a Global Eurobond with a
25-year maturity and a 9.25 percent interest coupon on
October 10. The instrument was well received by external
investors amidst rising US interest rates and at a time
when the external capital market has been wary of emerging
market debt. This is the third time the GOJ has been able
to raise external funds during 2005, suggesting that
international investors still maintain a high level of
confidence in the country's economic fundamentals and
ability to repay debt. However, unless the GOJ is able to
arrest inflation, the country could face some
macroeconomic challenges in 2006 when most wage contracts
come up for negotiation. Workers in general and public
sector employees, who have been reluctantly engaged in a
wage restraint agreement with the GOJ, will seek
substantial increases in wages to compensate for the loss
in purchasing power. However, generous wage increases
could provide further impetus for inflation and
inflationary expectations and could impact the exchange
rate, further eroding confidence.

ROBINSON