JAMAICAN ECONOMY STAGES MILD RECOVERY BETWEEN

UNCLAS SECTION 01 OF 02 KINGSTON 002651

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 ECONOMY STAGES MILD RECOVERY BETWEEN
JULY AND SEPTEMBER



1. Summary: Data released by the Planning Institute of
Jamaica on November 15 showed that the Jamaican economy
staged a mild recovery during July to September 2005.
Output expanded by an estimated 2.7 percent due to the
gradual normalization of some sectors of the economy
following the impact of hurricanes Dennis and Emily in
July 2005. The damage from both hurricanes amounted to
almost USD 100 million, or over one percent of GDP.
Inflation of 4.7 percent remained high due to policy-
induced and supply shocks. High inflation and
inflationary expectations and declining foreign exchange
inflows fuelled instability in the foreign exchange market
during the quarter. GOJ'S fiscal operations generated a
deficit of USD 110 million due to lagging revenues, as
spending was below target. GDP is expected to grow by 2.9
percent during the fourth calendar quarter due to improved
performance in the productive sectors (Note: The fiscal
year in Jamaica runs from April 1 to March 31. To avoid
confusion between U.S. and Jamaican fiscal years, however,
all quarters referenced in this cable are calendar
quarters. End note). Inflation should moderate due to
declining oil prices. This, combined with increased
inflows of foreign exchange, should temper demand
pressures in the foreign exchange market. However, while
most areas of macroeconomic management should show signs
of improvement, the GOJ will be hard pressed to rein in
the fiscal deficit. End summary.


2. The Jamaican economy is estimated to have grown by 2.7
percent during July to September 2005, according to data
published by the Planning Institute of Jamaica (PIOJ) on
November 15. This performance brought GDP growth for the
first nine months of 2005 to 1.4 percent. The improved
third calendar quarter performance was largely due to a
6.1 percent jump in goods production, signaling a
normalization of some sectors following the impact of
hurricanes Dennis and Emily in July (Note: The fiscal year
in Jamaica runs from April 1 to March 31. To avoid
confusion between U.S. and Jamaican fiscal years, however,
all quarters referenced in this cable are calendar
quarters. End note). In particular, the agriculture
sector registered growth of 2.5 percent, the first
expansion in over a year. Construction, which benefited
from hurricane-related rehabilitation work as well as from
burgeoning residential and infrastructure projects,
increased by 6.7 percent. Mining output soared by an
impressive 16.2 percent, as demand for aluminum remained
high. The services sector grew by only 0.8 percent, as
the usually buoyant tourism sector suffered from the
unusually active hurricane season. PIOJ estimates showed
that the cost of the damage and losses to infrastructure
and productive assets associated with the hurricanes was
about USD 100 million or about 1.5 percent of GDP.
Infrastructure with damage amounting to USD 78 million
suffered the greatest impact followed by the productive
sectors (USD 14 million),the social sectors (USD 5
million) and incidentals (USD 3 million).


3. Influenced by both policy-induced and supply shocks,
inflation jumped by 4.7 percent during the review quarter.
This brought inflation for the first nine months of
calendar year 2005 to 11.8 percent or five percentage
points above the result in the corresponding period of

2004. Rising oil prices, with benchmark West Texas
Intermediate peaking at USD 69.82 per barrel, drove
inflationary pressures during the quarter. Higher oil
prices had a direct effect on utility rates, which are
adjusted automatically for fuel charges. Higher utility
rates were also driven by a 5.8 percent annual inflation
adjustment to electricity prices. The oil price hike also
provided the impetus for the significant jump in
transportation costs, with bus fares increasing by almost
50 percent. Other underlying reasons for the relatively
robust inflation figure were higher school fees and costs
of back-to-school supplies and increased domestic food
prices following the adverse weather conditions.


4. Rising inflation combined with declining supplies of
foreign exchange, due largely to the slump in tourism,
fuelled frequent bouts of instability in the foreign
exchange market during the quarter. By the end of the
quarter the local currency had depreciated by 1.7 percent.
This compares with an appreciation of 0.02 percent in the
previous three quarters. The inflationary expectations
prompted investors to realign their portfolios, resulting
in a strong demand for U.S. dollar denominated
instruments. To ease the demand pressures, the Bank of
Jamaica sold a large amount of foreign currency to the
market. Despite these frequent interventions, the stock
of Net International Reserves was only depleted by USD
37.8 million to USD 2.1 billion.


5. GOJ operations generated a fiscal deficit of USD 110
million during the review quarter USD 67.2 million more
than budgeted. The deviation in the deficit was due to
the USD 110 million fall-off in revenue collections, as
expenditures were USD 42 million less than programmed.
Poor revenue performance was attributable to the slump in
consumption taxes and could be the result of the 10
percent increase in sales taxes. Lagging revenue
collections forced the GOJ to chop spending on social
programs and capital projects, in particular, to contain
the fiscal deficit.


6. Outlook: According to some reports, hurricane Wilma
in October did more damage island-wide than did hurricanes
Dennis or Emily, and significantly hurt Southern Florida.
While this may be reflected in the next quarterly data, it
is not expected to affect remittances from Florida, which
have historically been very resilient. With hurricane
season ending in November without any further disruptions,
real GDP is expected to grow by a further 2.9 percent
during the last quarter. Most of this expansion in output
should come from electricity, construction, tourism and
mining. However, construction performance could be
stalled by a shortage of cement from the country's sole
cement plant, Carib Cement. Tourism should rebound on the
back of an increased marketing campaign as well as the
anticipated diversion of tourists from Mexico to the
Caribbean following the devastation caused by hurricane
Wilma. Inflation for October 2005 was 0.6 percent and
prices should continue to moderate as policy-induced
shocks dissipate and oil prices stabilize. However,
seasonal (Christmas) influences from domestic food prices
could continue to buoy inflation. The foreign exchange
market continues to face increased demand pressures,
prompting the Bank of Jamaica to intensify its
intervention program. However, with the NIR remaining
high and with tourism and FDI inflows expected to pick up
in December the market could stabilize. Fiscal policy
will remain the most challenging area of macro-economic
management going forward. Data released by the Ministry
of Finance at the end of November show that the fiscal
deficit continued to widen on the back of lagging
revenues. With little or no adjustment possible on the
expenditure side, the GOJ will be hard pressed to meet its
fiscal target for the quarter. End outlook.

TIGHE