JAMAICAN ECONOMY DIPS IN FOURTH QUARTER OF 2004

UNCLAS SECTION 01 OF 02 KINGSTON 000613

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 DIPS IN FOURTH QUARTER OF 2004



1. Summary: Data published by the Planning Institute of
Jamaica (PIOJ) in February 2005 showed that Hurricane Ivan
dealt a serious blow to economic performance. Real Gross
Domestic Product (GDP) dropped by 1.8 percent as
agriculture continued to suffer from the effects of the
hurricane. The resulting higher food prices led to a
further acceleration in inflation. The government's
fiscal deficit was also above target, but the foreign
exchange market remained stable. Economic activity is set
to rebound during the first quarter of 2005, with the PIOJ
forecasting GDP growth of one percent due to robust
tourism and construction performance. Inflation is
expected to decline and the foreign exchange market should
remain stable. While the fiscal deterioration has slowed
significantly, the GOJ could be hard pressed to meet its
fiscal deficit target of four percent of GDP for the full
fiscal year. End Summary.


2. Economic performance was negatively affected by the
damage to infrastructure and productive assets caused by
Hurricane Ivan in September 2004. Real GDP declined by an
estimated 1.8 percent from October to December, the first
quarterly decline since June 2002, when flooding stymied
economic activity. The result for the December quarter
brought GDP for 2004 to 1.0 percent, well below the 2.5
percent target. Declining output was largely attributed
to a 4.8 percent drop in the goods-producing sectors
reflecting the impact of the hurricane on all areas of
agriculture (down 32.8 percent). Manufacturing also fell
by 1.0 percent due to lower levels of production at the
local petroleum refinery following a fire. However,
buoyed by rehabilitation work and increased residential
and commercial activity, construction jumped by 4.4
percent. Services declined by 0.2 percent due to the lag
effect of the hurricane on communications, distribution,
and miscellaneous services, including tourism.


3. The GOJ's operations generated a fiscal deficit of USD
133 million in the December quarter, only USD 16.4 million
more than forecast. This represents a significant slowing
in the deficit relative to target, suggesting that
normality has returned to revenue collections since the
hurricane. The deviations resulted from expenditures of
USD 834.4 million, being USD 8.2 million above target, as
well as a USD 8.2 million shortfall in revenues (USD 701.6
million). Due to increased food prices and energy costs,
inflation soared by 6.4 percent from October to December,
the highest quarterly increase in a decade. The result
also brought annual inflation for 2004 to 13.7, the second
consecutive year of double-digit inflation.


4. Despite the downturn in most areas of the economy, the
foreign exchange market remained stable throughout the
quarter. The exchange rate appreciated by 0.4 percent,
reflecting strong foreign exchange inflows from tourism,
remittances, mining and goods exports. The high foreign
exchange flows led to a build-up in the stock of Net
Investment Revenue (NIR),which stood at USD 1.9 billion
at the end of 2004.


5. Comment: Despite the shock to the economy following
Hurricane Ivan, the short-term prospects for the economy
remain positive. This outlook is based on declining
interest rates, normalization of activities in mining,
tourism and distribution and continued moderation in the
fiscal deficit and inflation. Construction activity is
also expected to remain healthy as hurricane related work
and hotel construction continues. As such, GDP is
expected to grow by one percent during the first quarter
of 2005. Price increases are expected to slow
considerably, given that domestic food supplies have
returned to normal and oil prices have been stable.
Inflation for January 2005 was zero percent. While the
GOJ will be hard pressed to meet its fiscal deficit target
of four percent of GDP, the result should not exceed five
percent, as revenue collections have returned to pre-
hurricane levels. With the economy expected to benefit
from significant foreign exchange inflows from tourism and
mining, the foreign exchange market should remain stable
for the first half of 2005. This, combined with the
general improvement in the economy, has prompted the Bank
of Jamaica (BOJ) to reduce interest rates to their lowest
levels in over a decade. The Bank has also reduced the
"Special Deposit" requirement of commercial banks and
licensed institutions by two percentage points to three
percent. End Comment.

TIGHE